Shares of tech giant Microsoft fell on Friday after CEO Steve Ballmer said that analysts' sales forecasts for the company's new Windows Vista operating system were "overly aggressive."
Ballmer's comments come two weeks after the world's largest software maker released Vista, the upgrade to its ubiquitous Windows operating system, and predicted that consumers will move to Vista faster than past Windows upgrades.
In a strategy presentation to analysts, Ballmer said Vista will create a "small surge" in PC sales in fiscal 2008, but would not spur a big increase over normal growth rates. "Some of the revenue models and revenue forecasts I've seen out there for Windows Vista are overly aggressive," said Ballmer. "I don't think that much new money will race out of the consumers pockets into PCs."
"We think management is being conservative at the start of the product cycle."" said Merrill Lynch anlayst Kash Rangan, in a research report Friday.
Prudential Equity Group maintained an "overweight" rating on the stock and said Ballmer's announcement was neutral as a whole.
"We continue to hear of large enterprise adoption of the entire suite of new products -- Vista, Office, Exchange, Sharepoint, and SQL Server," the firm said, "and we think the upcoming three-year renewal cycle of enterprise agreements coming in the fiscal fourth quarter is likely to accelerate this bookings curve."
Prudential maintained a price target of $36 on Microsoft shares. "We continue to think this stock will work higher as the new products ramp," it said.
Microsoft launched Windows Vista after more than five years of development and numerous delays. Windows runs on more than 95% of the world's computers and represents the company's biggest profit driver.
Centerpiece of Business
The Windows franchise is the centerpiece of Microsoft's business, because the company makes more than 75 cents in operating profit for every dollar of sales. The cash flow generated by Windows allows Microsoft to make investments in new business like digital music players and online services.
Investor optimism about Windows Vista helped to push the shares up 30% since June, even though the stock has dipped in recent weeks. Microsoft shares fell 1.2% in extended trading on Thursday to $29.10 from a Nasdaq close of $29.46.
Todd Lowenstein, a co-portfolio manager for HighMark Capital Management's Value Momentum Fund, which has about 3% of its $1.5 billion in assets in Microsoft, said the market may have gotten a little too excited about Vista. "The stock had a good run recently and maybe it got a little ahead of the fundamentals," said Lowenstein. "There will ultimately be a migration to Vista
and we think it's going to be a huge catalyst."
Redmond, Wash.-based Microsoft forecast sales at the Windows business to increase 11% to 12% in the current fiscal year ending in June from last year's revenue of $13.2 billion.
When one analyst told Ballmer that he was forecasting for 6% growth in the Windows business for the 2008 fiscal year starting in July, the CEO laughed and said that was a "small but not tiny" number.
Analysts on average expect Microsoft to generate sales of $56.4 billion in fiscal 2008, which would be an increase of 12% from this year's estimates, according to Reuters Estimates. Earnings per share are expected to rise 15% to $1.69 in fiscal 2008.
Ballmer forecast operating margins in Microsoft's Windows and Office businesses -- the company's two biggest units -- to be stable over the next few years.
Ballmer forecast Microsoft's fiscal 2008 operating expense growth to be "somewhat less" than the previous year, likely a bit below $2.7 billion.
Last year, Microsoft stunned investors with a plan to spend an additional $2.7 billion in expenses across the company including about $500 million to beef up its online business. "We will have moderating growth in operating expenses next year, but I wouldn't expect a huge drop," Ballmer said.
Microsoft said the company was willing to spend money to acquire online customers as it battles for share against rival Google . Ballmer said the company wanted to close the gap in online search against Google and continue to make strides in Web display advertising.
Ballmer also said Microsoft did not plan any major strategy shifts in how it returns cash to shareholders through buybacks and other means.
Microsoft started a share buyback program in August that authorizes the company to repurchase up to $36 billion worth of its shares through June 30, 2011.