Microsoft’s Research Plan Stirs Theories
What’s Microsoft Corp. got up its sleeve?
The software giant baffled financial analysts Thursday with coy responses to questions about its unexpected plans to invest an additional $2 billion on research -- an expenditure that will drag on earnings through its next fiscal year.
The questions came as Microsoft reported that fiscal third-quarter sales rose 13% and profit jumped 16%, but the results fell short of expectations. Its shares drooped 6%.
Microsoft executives were pressed to explain why revenue was projected to rise faster than profit in the coming year. Analysts suggested various scenarios -- such as set-asides for possible antitrust payments in Europe or massive publicity for the launch of Windows Vista. Or is it a secret project?
“There’s something really big here that I’m not sure we’ve put our finger on,” Rick Sherlund of Goldman Sachs & Co. said during a conference call with Microsoft. “It sounds like you are building a Google or a Yahoo inside the company.”
Chief Financial Officer Chris Liddell advised patience without providing details about aggressive investments in several core and emerging businesses such as the Xbox 360 video game console.
“I don’t think there is any Trojan horse there,” he said.
The company already spends more than $6 billion annually on research and development.
The Redmond, Wash.-based company earned $2.98 billion, or 29 cents a share, in its fiscal third quarter that ended March 31, up 13% from $2.56 billion, or 23 cents, a year earlier. Analysts surveyed by Thomson Financial had projected earnings of 33 cents; not counting a legal charge, Microsoft would have earned 31 cents.
It logged revenue of $10.9 billion, up 13% from the same quarter a year ago. Analysts had projected sales of $11.04 billion.
Microsoft shares rose 15 cents to close at $27.25 before the earnings announcement, but after-hours traders hammered the stock, which fell $1.66.
The company’s software powers more than 90% of the world’s PCs. Sales are expected to rise just 10% in 2006, compared with an increase of 16% last year, according to market researcher IDC.
Microsoft’s home and entertainment revenue was up more than 80%, helped by brisk sales of the Xbox 360, which beat Sony Corp.’s rival PlayStation 3 to market by nearly a year. Despite supply constraints, Microsoft sold 1.7 million Xbox 360s in the last quarter, said Colleen Healy, director of Microsoft’s investor relations. It should be able to meet demand within a few more weeks, she said.
The signs are less optimistic for Microsoft’s struggling online efforts.
The MSN websites lost money in the fiscal third quarter, and surrendered ground to Google Inc. in the search wars -- a key to advertising revenue. MSN powered 13.2% of Web searches in March, compared with 16.5% a year earlier, according to a survey by Reston, Va.-based ComScore Networks. Google’s share of searches increased to 42.7% from 36.4% in the same period.
Last year, Microsoft launched a major Web services effort under the “Live” rubric, meant to integrate its Windows and Office software with online services to create major new revenue streams.
The company also has moved to retool its underlying search and advertising technology, slow and costly efforts that may explain the boost in spending.
“They are entirely focused on Google and Yahoo,” Sherlund said in an interview after the conference call. “And they feel like they really need to invest to narrow that gap in their online business.”
