Financial analysts anticipate Microsoft update

About 300 financial analysts will flock to Redmond on Thursday, expecting a broad, deep update from top Microsoft executives on everything from the company's $2.7 billion spending increase to its new iPod challenger.

"They usually do a very good job of covering every aspect of every business line and going into more detail than they do at any point throughout the year," Brent Thill, director of software research at Citigroup Investment Research, said of Microsoft's annual Financial Analyst Meeting. Citigroup owns shares in Microsoft and its competitors.

Uppermost on the minds of many analysts is the company's plan to spend an additional $2.7 billion in its current fiscal year, which began July 1.

When Microsoft first revealed the outlay in April, surprised investors dumped the stock. Last week, the company outlined spending on sales and marketing, the launch of the newest version of its two flagship products, research and development and Internet offerings to compete with Google and Yahoo!

Analysts want more details on how the spending will differentiate Microsoft's offerings from those of its chief competitors.

"I think a lot of investors are looking at what's the return on this investment," said Charlie Di Bona, senior equity analyst at Sanford C. Bernstein, whose parent company owns shares in Microsoft.

About $500 million of the spending is being devoted to Microsoft's Internet-services strategy, a fleet of consumer- and business-focused initiatives to deliver software as a service. These include e-mail, Internet search and business-specific applications.

Central to the effort is adCenter, an effort to sell targeted advertising to users of Microsoft's search engine and other Web properties.

"That's a big deal at MSN in that it's the thing that should get revenue growth and improved margins in the search business," said Alan Davis, senior research analyst at D.A. Davidson, which makes a market in Microsoft's stock. Davis does not personally own shares.

Revenue at the MSN division declined 3 percent last quarter, but growth is expected to accelerate over the next three years. The company forecast 7 percent to 11 percent growth at the division for the current fiscal year.

He will also be watching for signs that Microsoft's earnings will start growing faster than its revenue. That was something investors had hoped for this year with the launch of Windows Vista and Office 2007, but the spending increase will probably push that back to fiscal year 2008, he said.

Davis and others are looking for any indication that the release schedules for the two products slipped again. Both are due for broad availability early next year.

Analysts expect a closer look at Zune, the digital music and entertainment product Microsoft announced last week, confirming months of rumors. It would compete with the dominant Apple iPod, which owns 70 percent of the market.

The biggest story at Microsoft so far this year is the change at the top. Analysts will be watching Ray Ozzie and Craig Mundie, the two men taking over Bill Gates' day-to-day functions at the company during the next two years.

Ozzie, the chief software architect, is heading the Internet-services strategy.

"I'm just curious to see how prominent he is in the meeting and what he says," Davis said.

Gates is on an extended summer vacation and is not expected to attend Thursday's meeting.

Thill said he'll be looking for word of stability throughout the organization after a year of leadership and structural shuffles.

Analysts savor the direct access they're typically granted to executives at the meeting. They jockey for position near Chief Executive Steve Ballmer during time set aside for informal conversations. In years past, Ballmer and Gates were surrounded by analysts sitting "two rows deep by the end of lunch," Davis said.

Bob Toomey, chief equity analyst with Seattle-based E.K. Riley Investments, said he's looking for "open and honest" commentary from executives on competitive threats and the status of new products and speaking directly to them "certainly provides a lot of insight."

Toomey, who owns Microsoft shares, also maintains a healthy skepticism.

"They're always going to want to spin the positive, so you have to take some of it with a grain of salt," he said.

If company leaders can project a shareholder-friendly image, it could help reverse a negative perception that has dragged on the stock price, Di Bona said.

Microsoft has already made strides in that direction with the announcement last week of an additional $40 billion stock-buyback program — partially in response to investor feedback. Di Bona said that indicates the company is listening.

"That, I think, is one of the most important things that they need to convey in order to untap the value that we see in the stock," Di Bona said.

Benjamin J. Romano:206-464-2149 or bromano@seattletimes.com