Fool Plate Special: The Ballmer that Cried Wolf

An Investment Opinion

The Ballmer that Cried Wolf

By Matt Richey (TMF Verve)
September 24, 1999

Microsoft (Nasdaq: MSFT) is up to its old tricks again. In the name of "managing expectations," President Steve Ballmer is working double-duty these days to hold down the software king's stock price. Yesterday's comments by Ballmer of tech stock overvaluation were just the latest attempt by Microsoft to discourage its investors from becoming overly bullish on the company's prospects.

Microsoft has been playing this game for quite a while now, but lately Ballmer has become increasingly vocal in his efforts to squelch investor enthusiasm. At a financial analyst meeting in July, Microsoft's Investor Relations Director Carla Lewis polled the audience on its revenue growth estimates for the coming fiscal year. Ballmer was "shocked" that the largest portion of the audience -- 44% -- expected revenue growth of 25% or greater. The boisterous president was somewhat unruffled in his reaction:

"Come on? It's outlandish and crazy. We have more competition than we ever have had before, we're fighting the law of large numbers in a way we have never had to fight the law of large numbers before.... Oh it's crazy."

Oh really. Microsoft's so-called "conservative" guidance in projecting future results is almost laughable. Back in April when the company announced its third quarter earnings, CFO Greg Maffei told conference call listeners to expect sequential revenue growth "in excess of $500 million." In actuality, Q4 revenue was $1,500 million ahead of the Q3 number. Oops, what's a comma and a couple of zeros among friends? Also on the April conference call, Maffei predicted Q4 year-over-year revenue growth in "the mid 20s" and earnings per share growth (EPS) of 40%. The actual numbers were 39% and 60%, respectively. In effect, Maffei low-balled estimates by 50%. I'm all for genuine conservatism in financial projections, but this is a bit extreme.

Furthermore, investors have good reason to be excited about Microsoft's prospects. The company is literally at the cusp of a major new product cycle. Over the next two years, Microsoft will be releasing a whole slew of products that reflect a new mindset of software as services. Bill Gates and company know that people don't buy an operating system; they buy solutions. Gone is the vision of a PC on every desk. The new corporate vision is one of empowering people through great software -- anytime, anyplace, and on any device.

The strategy for manifesting that vision is a new development platform called Windows Distributed interNet Architecture (DNA) 2000. The goal of this platform is to enable programmable Web services. One such service that Microsoft has already announced is "Passport." Much like a traditional passport, this Internet "mega-service" provides authentication and wallet capability so that Internet users don't have to use different ID-names and passwords from one site to the next. According to the company, many more of these mega-services are on the way.

I'm not a techie, so here's a brief layman's explanation of how this technology works: The essence of Microsoft's plan for enabling Web services is a technology called eXtensible Markup Language (XML), which will allow websites to "talk" to one another, and in much more depth and complexity than HTML currently allows. Because XML is not constrained by the Internet's diversity of operating systems and programming languages, XML is the key to allowing businesses to integrate their applications and services on the Internet. The result: this technology makes the Web programmable. For the full story on how Microsoft intends to develop Web applications, see these remarks by Steve Ballmer.

Over the next two years, Microsoft will roll out the tools and technologies that make up the Windows DNA 2000 platform. Here are a few of the new products you can expect from the Redmond software shop:

Windows 2000 -- Expected to arrive by the end of this year, the new operating system is in extensive beta testing right now. In addition to greater manageability and reliability, Windows 2000 is XML-ready so that developers can write code that will allow one website to interact with another, and thereby give rise to Web services.

Commerce Server 4.0 -- The next generation of the industry's leading packaged business-to-consumer commerce software.

BizTalk Server -- A new business process integration solution.

"Babylon" Integration Server -- A tool to commerce-enable a variety of older legacy applications and hosts.

AppCenter -- A new product that makes managing server farms as simple as managing a single machine.

SQL Server "Shiloh" -- The next generation of the popular database server that adds native XML support, integrated data mining capabilities, and greater scalability.

Visual Studio -- The development tools that provide a common development environment for Windows DNA.

If developers embrace Microsoft's vision for a programmable Web, then the company's next five years could be more profitable than the last five. Investors would do well to assess Microsoft's new strategy for a programmable Web and ignore management's attempts to "manage expectations" with unfounded arguments of an overvalued stock.