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February 16, 2007

Ballmer's update: Reading (between) the lines

Posted by Benjamin J. Romano at 11:12 AM

Microsoft's stock is down about 2.2 percent in mid-afternoon trading to $28.80 as investors digest Chief Executive Steve Ballmer's strategic update yesterday.

The headlines? His warning to Wall Street analysts that some of their forecasts for Windows revenue in fiscal 2008 were "overly aggressive" and his pledge to keep operating expense growth below the $2.7 billion figure that landed on the stock like a ton of bricks last year.

For close followers of the company, it might be worth reading the transcript of the presentation (download Word document here).

If you're tracking the progress of the Xbox business, Ballmer's comments on console pricing might be of particular interest. The Entertainment and Devices Division is committed to profitability in fiscal 2008. Asked about the potential of a price cut on the Xbox 360 console, Ballmer said, "I think every console in the world has had a price decrease sometime in the first few years. I don't know whether we'll have a price decrease in the first few years, and I don't want to comment on that, but I will highlight for you that every console has had a price decrease in the first few years."

Mary Jo Foley interprets how Ballmer views the Microsoft-Novell relationship. Here's what he said:

The deal that we announced at the end of last year with Novell I consider to be very important. It demonstrated clearly the value of intellectual property even in the open source world. I would not anticipate that we make a huge additional revenue stream from our Novell deal, but I do think it clearly establishes that open source is not free and open source will have to respect intellectual property rights of others just as any other competitor will.

Here are a couple of analysts' takes:

Sid Parakh of McAdams Wright Ragen wrote in a research note this morning that the update appeared to be aimed at "managing expectations" and priming Wall Street analysts for the company's fiscal 2008 forecasts, due out in April.

He fine-tuned his own estimates as a result, decreasing fiscal 2008 revenue estimates by $293 million to $56.7 billion. That correlates to a dialed-down Windows revenue growth rate. Parakh lowered the rate from 11 percent to 9 percent. He did not change his earnings-per-share estimate, currently $1.72 for fiscal '08, because the lowered revenue estimate was offset by Ballmer's guidance on moderated operating expense growth.

Brent Thill of Citigroup wrote "Our biggest takeaway from the event is that MSFT is clearly trying to temper the exuberance in some Street models over Vista." He left his models unchanged at 9 percent Windows revenue growth in fiscal '08. "Our view remains unchanged that Vista will have a gradual uptake and will not create a significant spike above the normal trend line of PC growth," he wrote.

You can see IDC's latest PC growth estimates here. An interesting note to go with IDC's numbers: Analyst Loren Loverde told me in an e-mail last night that "the fourth quarter of 2006 was weaker than expected -- particularly in the U.S. and Japan. We will finish updating our forecasts in a couple weeks, but in the meantime the assumption is that 2007 growth may come down a little (0-1% by early estimate)."

Brier Dudley asks some interesting questions in his take.

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