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Microsoft needs to clarify spending

Analysts stumped by financial plans

Analysts are looking for Microsoft to this week shed more light on how it expects its fiscal 2007 spending to pay off for the company and its shareholders.

Last week's fourth-quarter earnings call was the first time Microsoft gave a breakdown of how it plans to spend nearly $3bn (about £1.6bn) during its 2007 fiscal year, which began 1 July. Of that investment, $500m (£272m) will go into expanding the online business, including the adCenter paid-search platform and Live online services, such as Office Live, CRM Live, Windows Live Search and other web-based offerings.

Microsoft said it would spend $450m (£245m) on marketing and launch costs related to its two major product launches in 2007, Windows Vista OS and Office 2007; $450m for sales force and general marketing growth; $1bn (£543m) for the development of high-growth products and services, such as business intelligence, unified communications and IPTV; and another $300m (£163m) in general cost increases and other unspecified spending.

What's not clear is how this spending, which initially was frowned upon by Wall Street because of its amount, will bring more revenue to the company, and more return to investors. Analysts are hoping for clarity on that at Thursday's annual Financial Analyst Meeting in Redmond, Washington, they said.

"The topic where we would like more granularity is what type of return should investors expect from the FY07 incremental investments and over how long of a time period," UBS analyst Heather Bellini wrote in a research note last week.

In particular, analysts said they will be looking for information about how investment in online properties and services, especially adCenter, will pay off. Microsoft launched adCenter in the US in May as part of its plan to win more advertising revenue for its search engine and online properties. However, during its quarterly earnings announcement last Thursday, Microsoft said growth in advertising for its MSN business remained flat, and MSN revenue was down 3 percent year-over-year.

With online advertising numbers for both Google and Yahoo continuing to grow, it seems Microsoft should be seeing more gains in that area now that adCenter has been rolled out, said Matt Rosoff, an analyst with Directions on Microsoft.

"We’re seeing Google and Yahoo grow fast, so when is Microsoft's advertising revenue growth going to start rising?" he said. "They're investing a lot in building this out. At some point you want to see them capitalise on that or make a prediction [on how long it will take]."

Analysts hope to hear more about Zune, Microsoft's planned music player and service to rival Apple's iPod and iTunes. Microsoft on Friday confirmed it was working on Zune, which the company bills as a combination of hardware and software aimed at building a community of users to connect them to music and each other, and expects the first offerings to be available this year. But it didn't say exactly how Zune will work, and whether it will be as important a product as its Xbox game console or just another product in its growing entertainment portfolio.

"I'm interested to know how much they’ll spend on manufacturing, marketing, what kind of market share and revenue they expect [from Zune]," Rosoff said.


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