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Slow Vista adoption could pinch Microsoft

There are signs that companies' reluctance to install Vista is starting to weigh on Wall Street's outlook for the company's stock.
/ Source: Business Week

Microsoft has irked consumers and corporate customers with the most recent version of its Windows operating system, which they complain requires hefty investments in PC hardware and offers a paucity of compelling new features in return. Now there are signs that companies' reluctance to install Vista is starting to weigh on Wall Street's outlook for the company's stock.

Charles Di Bona, a senior analyst at Sanford C. Bernstein and a noted bull on Microsoft, said in a June 10 report that "dampening" adoption of Vista by corporate customers will shave $395 million in revenues and 2 cents a share in earnings from the company's financial results for the 2009 fiscal year, which begins July 1. According to a Bernstein Web survey of 372 information technology professionals fielded in May, companies expect just 26 percent of their PCs to be running Vista by the beginning of 2011, down from an estimate of nearly 68 percent of computers by respondents to a similar survey a year ago.

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Shares down for the year
The new survey, conducted primarily in the U.S. in conjunction with Ziff Davis Media and Peerstone Research, also shows Vista's requirement of running on PCs crammed with lots of memory and powerful processors to be a deterrent. Companies expect to install Vista on only about 10 percent of the PCs they already own, compared with estimates last year that they'd be able to do so on 27 percent of their machines.

"It seems like the IT community has turned tepid to negative" on Vista, says Di Bona in an interview. "There aren't any features in there they find compelling — even ones that haven't had bad PR." For example, companies said in the survey that they were indifferent to Vista's Windows Presentation Foundation technology for building visually compelling programs, according to Di Bona.

Windows Vista, which debuted in January, 2007, has suffered from a number of shortcomings. Besides the hardware requirements, customers have complained about clumsy new security procedures and a lack of compatibility with some companies' existing software programs. As a result, companies including General Motors are considering bypassing the system altogether and waiting for Microsoft's next operating system, code-named Windows 7. Tepid Vista sales have also begun to affect Microsoft's financial results: Sales of desktop Windows fell 2 percent, to $4.03 billion, and contributed to flat revenues during Microsoft's third quarter, reported April 24. Shares of Microsoft closed June 11 up 18 cents, or 0.65 percent, to 27.89. The shares are down nearly 22 percent this year.

No surge in sales expected
To be sure, Di Bona's assertion that slow Vista uptake will remove $395 million from his estimates of Microsoft's fiscal 2009 sales, and $49 million in sales from the remainder of fiscal '08, amount to a drop in the bucket for the world's largest software company. Wall Street expects Microsoft to earn $1.89 a share on $60.25 billion in sales for the fiscal year that ends June 30, and analysts expect earnings of $2.16 and revenues of $67.31 billion in fiscal 2009.

Di Bona's 2009 earnings estimate of $2.17 per share is still a penny above analysts' consensus estimate. And he raised his revenue estimate for 2010 by $429 million to reflect what he expects to be strong retail following the launch of Windows 7. The Bernstein analyst maintains an outperform rating on Microsoft's stock, in spite of the latest survey findings.

Other analysts on Wall Street are more cautious because of the slow Vista sales. Andy Miedler, a senior technology analyst at Edward Jones who has a hold rating on Microsoft's stock, says he expects Microsoft to earn $2.14 per share in fiscal 2009 and has "taken a more conservative view" on the company's performance. "In a challenging economic environment like we are in, an upgrade to Windows Vista is an area that can be cut to save money with little business impact," he says. Israel Hernandez, an analyst at Lehman Brothers who has an equal rate rating on Microsoft, hasn't changed his outlook on the company, but says Vista has been a "disappointment" in the corporate market. "I'm not holding my breath for any big surge in Vista enterprise sales."

Windows 7 allure
On the other hand, Mike Olson, an analyst at Piper Jaffray, who rates Microsoft a buy and expects 2009 earnings of $2.16 per share, says he doesn't expect enough delayed installations of Vista at companies to affect his expectations.

For Microsoft, a key challenge in its Windows business right now is to encourage companies to keep installing Vista while it trickles out information about Windows 7. At a recent conference, Microsoft Chairman Bill Gates and CEO Steve Ballmer demonstrated Windows 7's new user interface, which allows users to manipulate objects on a PC screen using their fingertips.

There are signs Microsoft is stepping up marketing of Vista to corporations as well. On June 4, the company released a white paper citing "five reasons to deploy now," including security and better performance on laptops. According to Di Bona, the company needs to do more to market Vista's capabilities to businesses. "They've said they're going to let the facts speak for themselves," he says. "Sometimes you need to give the facts a megaphone."