Microsoft Execs Warn Of Looming Disappointments The Next 12 Months May Be Difficult Ones For The Software Giant

The message from Microsoft Corp. executives these days is this: There’s no guarantee the software company’s phenomenal growth will continue, and the next 12 months will be tough.

Company executives are trying to dampen Wall Street’s expectations for the current fiscal year, warning that Microsoft faces higher expenses without added sales from a major new product.

Microsoft says Windows 98, an upgrade to the Windows 95 personal computer operating system, won’t be ready for sale until sometime in the first three months of 1998. While executives say the software will be faster, have more features and will be easier to use, it won’t be the huge technological change that marked Windows 95.

“The reality is, none of us is projecting that Windows 98 is going to be the blockbuster of Windows 95,” said Greg Maffei, chief financial officer, adding that “We are in the trough between major product cycles.”

The next version of Windows NT, Microsoft’s operating system for higher-powered computers and corporate networks, probably won’t be out before the end of the fiscal year next June 30.

Executive Vice President Steve Ballmer recently told The Wall Street Journal that people will be disappointed with the company’s profits next year and that Microsoft isn’t worth its stock market value.

But many investors aren’t apparently listening yet. Microsoft’s stock fell 3 percent Thursday after Ballmer’s remarks were reported, but had recouped much of that loss by midday Friday. Investors apparently recall Microsoft’s repeated attempts to minimize expectations and are viewing the latest warnings with doubt.

Bob Herbold, chief operating officer, said the company has worked hard to lower costs, including contracting out most software manufacturing and hundreds of service jobs.

But he said the company will spend heavily in sales, support and marketing. Microsoft plans to add about 2,500 employees over the next year, nearly all in customer support, to reach worldwide employment of about 24,500, he said.

Microsoft spent $24.4 million in the last fiscal year on Internet advertising alone, six times what it spent in fiscal ‘96, and expects to spend even more this year, Herbold said.

Maffei said research and development costs will top $2.6 billion this year, $400 million more than in fiscal ‘97.

Microsoft has long rewarded its employees with stock options, which have made many of them millionaires. But the company’s $240 million outstanding option shares are a worry, Maffei said.

If there is a “prolonged doldrum” in the stock price, he said, Microsoft would have to significantly up its pay to hold on to key workers.