Microsoft Details Servers, Search Plans

When CEO Steve Ballmer took the stage last week to address Microsoft's annual meeting for financial analysts, he was, by his own description, "super pumped up."

Little wonder. With profits up nearly 8.5% for fiscal 2004 on a revenue increase of 14%, Microsoft's two key business-performance metrics are both pointing in the right direction. And one week earlier, the company outlined a plan to reward investors with $75 billion in dividends and stock buybacks over the next four years.

Microsoft admits it's a hard act to follow. "Every year seems to have tough comparables," says CFO John Connors. For fiscal 2005, Microsoft is forecasting moderate sales growth of 4% to 5%. But that's most likely a conservative estimate, and the company predicts continued revenue growth in each of its seven business segments. "We do expect every single business should improve in fiscal 2005," Connors says.

In its server and tools business alone, Microsoft plans to deliver Operations Manager 2005 and Virtual Server 2005 later this year, and Visual Studio 2005, SQL Server 2005, System Center 2005, and several new flavors of Windows Server 2003 next year. The latter include a version of the operating system designed to work on new 32-bit/64-bit processors from Intel and Advanced Micro Devices Inc. and another for supercomputing-class environments. The company will tune its Visual Studio 2005 tools to work with the new Windows Server 2003 High-Performance Computing release.

In addition, Microsoft will ramp up its patent-filing and intellectual-property licensing efforts, chairman and chief software architect Bill Gates said. The company plans to file more than 3,000 patents in fiscal 2005, compared with "something more" than 2,000 patent filings the previous year, Gates said. The company's planned "cycle of innovation" includes securing intellectual-property rights on Microsoft products and licensing that technology to other companies, signing license agreements to use other companies' software within Microsoft's own products, and providing indemnification protection to customers.Microsoft demonstrated for the first time a data-search engine in development that promises to scour both the Web and a PC's hard drive for relevant matches. For example, it might find data inside an Excel spreadsheet that's attached to an electronic message, as well as on a faraway Web server. "People say, 'What do you bring to the party?' It's the ability to search what's beyond the Web," says Yusuf Mehdi, corporate VP of MSN Information Services and Merchant Platform. Microsoft's search engine is based on technology from Microsoft Research and the company's Office and Longhorn development groups, and it has already indexed more than a billion documents. Mehdi declined to say when it will be ready.

Forrester Research analyst Frank Gillett says there's little to stop Google Inc. or other companies in the search-engine business from developing search technology similar to Microsoft's. More compelling, Gillett says, is Microsoft's end-to-end software stack that ties together everything from desktop tools to enterprise-resource-planning applications. "That's so powerful," he says.

Within four years, Ballmer estimated, 40% of Microsoft's profits will be generated by the company's emerging lines of business: enterprise applications, software for mobile devices, MSN, and home and entertainment. The vendor might also enter entirely new lines of business, but Ballmer admitted he doesn't have all the details worked out: "Some will say, 'What are they?' To which I say, I don't know."