May 1, 2006 4:05 PM PDT
Ballmer: Not the time to scale back
In a memo sent to all employees late Friday, Ballmer said that the investments are needed to ensure the company's future.
"Throughout our history, Microsoft has won by making big, bold bets," Ballmer said in the memo, which was seen by CNET News.com. "I believe that now is not the time to scale back the scope of our ambition or the scale of our investment. While our opportunities are greater than ever, we also face new competitors, faster-moving markets and new customer demands."
On Thursday, Microsoft offered sales estimates for the current quarter and next fiscal year that largely matched what investors had expected. However the company forecast sharply lower earnings for both periods, saying it planned to step up its investments, particularly in Internet services that compete with Google and others.
Shares of Microsoft tumbled following the report, prompting Ballmer to issue his note to employees. Ballmer said that the increased investment plans came as a surprise to Wall Street. "The change in our stock price reflects this."
Indeed, many analysts were critical of Microsoft's move. Credit Suisse analyst Jason Maynard summed up Microsoft's forecast in a research report last week headlined "Margins Get Googled."
Maynard said that the software maker's move "directly reflects the threat of software as a service and online business models to Microsoft's legacy, PC-centric franchise." Still, the analyst said that doesn't mean it is time to invest in the company. "We see no reason for investors to (buy shares) at current levels."
However, Ballmer said the investments are needed, even though they will take time. He also pointed to the fact that Microsoft is just starting to reap rewards from its decade-long investments in software for TV set-top boxes. "Our bold bet on television is about to begin to pay off," he said.
Details of Ballmer's memo were reported earlier Monday by Bloomberg News.
As for the competition with Google, Ballmer said that one of the keys is having better technology to serve up advertising. The company is in the process of transitioning its search engine from the former Overture service, now owned by Yahoo, to Microsoft's own AdCenter engine. The company will also need to bulk up on both development talent and the servers needed to run such services, Ballmer said.
"These are long-term investments, and we may not see results overnight," he cautioned.
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