Microsoft Slips After CEO Talks Down Some Vista Estimates

CEO Steve Ballmer tells analysts that some forecasts for Vista sales are too aggressive, prompting investors to boot out of the shares

When Microsoft (MSFT) launched its Windows Vista operating system on Jan. 29, investors hoped the Redmond (Wash.) technology giant would spur the next upgrade cycle for PC sales (see, 1/30/07, "Bill Gates' Vision for Vista"). However, CEO Steve Ballmer warned that some Wall Street analysts have gone too far with their expectations for Vista in fiscal 2008, and disappointed investors sold Microsoft shares Feb. 16.

Ballmer said in a presentation to analysts on Feb. 15 that Vista will create a "small surge" in PC sales in fiscal 2008, but would not spur a big increase over normal PC growth rates, according to Reuters. "Some of the revenue models and revenue forecasts I've seen out there for Windows Vista are overly aggressive," said Ballmer, reported Reuters. "I don't think that much new money will race out of the consumers pockets into PCs."

For now, the mean analyst estimate is for Microsoft to have $1.70 earnings per share and $56.4 billion revenue in fiscal year 2008, according to the San Francisco research firm Starmine. That implies 11.6% revenue growth compared to 2007 forecasts.

JP Morgan analyst Adam Holt said Ballmer later clarified that he's uncomfortable with expectations of 12-15% revenue growth. The CEO's comments about Vista on Feb. 15 were "likely to create confusion," Holt said in a research note.

Microsoft shares dipped 2.3% to $28.79 in afternoon trading on the Nasdaq Feb. 16.

Ballmer also said that non-corporate upgrades to Vista will decelerate after a huge increase in fiscal year 2007, Standard & Poor's Equity Research analyst Jim Yin said in a research note. (S&P, like, is owned by The McGraw-Hill Companies.) "We believe our current estimate for MSFT client revenue growth rate of 6.1% in FY 08 is appropriate, given the factors discussed," Yin wrote. "However, we believe Ballmer's comments will weigh on the stock."

Microsoft took more than five years to develop the new operating system for computers and has spent hundreds of millions to market Vista. It has features like better security and it boots up more quickly than the old Windows XP operating system (see, 2/5/07, "The Real Value Of Vista").

But Ballmer said fiscal 2008 operating expense growth will be "somewhat less" than the previous year, Reuters reported Feb. 15. Last year, Microsoft planned to spend an additional $2.7 billion in expenses across the company including about $500 million to beef up its online business, Reuters said.

JP Morgan's Holt feels better now that Microsoft's profit margins can expand in 2008, which the investment firm had assumed in its numbers. However, Holt thinks this is not reflected in investor sentiment about the stock's value. Pointing out that Ballmer has now set a “low bar” for fiscal year 2008, Holt expects Microsoft to outperform in the market as investors get further visibility on the company's earnings. (JP Morgan does business with companies covered in its reports.)

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