‘Non-event’ expected for Microsoft strategic update

Microsoft will give analysts in New York a strategic update on the company’s business Thursday, but they aren’t expecting a repeat of the surprise dished up last April.

“We are expecting a non-event,” wrote Citigroup analyst Brent Thill in a research note released Wednesday. Since analysts’ briefing with Microsoft CEO Steve Ballmer and CFO Chris Liddell is only scheduled for an hour, “we expect it to be nothing more than a cheerleading session around Vista/Office 2007, and an update on the online and entertainment initiatives,” he wrote.

Last year during its April 2006 earnings call, Microsoft surprised Wall Street analysts by lowering its earning forecasts for fiscal 2007 because it expected to spend US$2 billion more on operating expenses than previously expected. The company cited marketing and other costs associated with promoting the launch of Windows Vista and Office 2007 — which were released to retail on Jan. 30 — as one of the reasons for increased spending. Still, analysts and investors were hardly pleased with the news, and it sent Microsoft’s stock plunging.

There should be no such shockers on Thursday, according to a research note by Israel Hernandez, a Lehman Brothers Inc. analyst. In fact, Hernandez wrote that he expects the meeting is intended to “pre-empt any surprises” in Microsoft’s financial guidance for fiscal 2008, which begins in July.

Still, analysts do have their concerns about some information Microsoft may provide at Thursday’s meeting. According to Hernandez, some analysts think that Vista retail sales have been slower than expected since its Jan. 30 launch, and that Microsoft “may tone down expectations” for OS sales in fiscal 2008.

However, since the product was only recently released, “it is very unlikely that Microsoft will have anything negative to say about the launch,” he wrote.

Another risk heading into Thursday’s meeting is that Microsoft may announce that it’s going to increase spending in its online business, which could drive earnings down and make the stock less attractive for investors, according to a research note by Adam Holt, a JPMorgan Chase & Co. analyst.

However, Holt wrote that even if this happens, Microsoft can absorb those costs in other areas of the business — such as reducing spending in its sales and marketing and research and development segments — so it does not affect the company’s earnings.

“Even with a 20 percent to 30 percent increase in spending on new initiatives on FY08 margins could still expand substantially,” he wrote.