Microsoft has been sending signals to investors this week amidst a U.S. economy teetering on the edge of a major financial meltdown. On Monday, the company described a stock buy-back plan of $40 billion that was approved by Microsoft's board. Companies typically buy back their stock when they have cash reserves and feel their stock may be undervalued.
Microsoft also started a debt financing program -- a "first-ever commercial paper program" of $2 billion, according George Zinn, Microsoft's treasurer. The company plans to use the money for working capital and stock repurchases.
Microsoft got top-grade ratings for its debt, both short-term and long-term, from Standard & Poor's Rating Services and Moody's Investors Service. However, the company's long-term debt got downgraded to an "AA+" by Fitch Ratings, according to an AP story published on Friday. Fitch cited potential challenges to Microsoft's business model, pointing to open source software and Internet cloud-based computing as possible disruptors, as well as potential problems on the regulatory front.
Meanwhile, Microsoft's CEO Steve Ballmer has been hitting the road, speaking at three business-oriented venues in the last couple of days.
On Thursday, Ballmer spoke before an audience at the Santa Clara-based Churchill Club. He joked about the bad financial news running on CNBC, but mostly to suggest that Microsoft expects to weather the current economic storm.
"Our industry is not immune to what goes on in the global economy…but I would say given the current circumstances, people still see a certain buoyancy in the market," Ballmer said. The Churchill Club talk was moderated by Ann Winblad, founder of the Hummer Winblad venture capital firm. She reportedly dated Microsoft's Chairman Bill Gates for five years.
Ballmer added that nobody is really sure just how bad the economic fallout will be.
Currently, the economic horizon seems bad indeed. The U.S. Congress is contemplating a $700 billion U.S. taxpayer-funded bailout plan for Wall Street, based on consequences from the industry's practice of stuffing bad housing debts into securities. Also, Washington Mutual Inc. collapsed. It was the largest savings and loan failure to date. WaMu was bought in an auction by JPMorgan Chase & Co., according to reports on Thursday.
Ballmer told the Churchill Club that Microsoft has shifted its focus more toward digital lifestyle products and software plus services. The company also is enacting its long-term organic growth vision toward the search advertising business in the wake of its failed Yahoo bid. Ballmer explained that Microsoft would "be willing to lose between five and ten percent of our total operating income for several years" to catch up with its search competitors, which include Google and Yahoo.
Microsoft has become a major online advertising player, having sold more than $3 billion in ads per year, Ballmer said.
Microsoft sees virtualization as an untapped opportunity as "less than five percent of all servers are virtualized," Ballmer said. He criticized rival company VMware, suggesting that it was charging three times the cost of a server for its virtualization solution.
Another area of expansion for Microsoft is the smart phone market, where 125 million smart phones have been sold this year, Ballmer said.
Ballmer quibbled with the term "cloud computing," which Winblad suggested was a hot-ticket item. However, when she directly asked Ballmer about Project Red Dog, a supposed Microsoft cloud computing utility, he refused to describe it. Ballmer said that Microsoft would talk more about Red Dog in about six weeks at its Professional Developers Conference in Los Angeles.
One area where Ballmer said "we've got some work to do" was with Web servers. He noted that Microsoft holds about 40 percent of the Web server market, whereas Linux-based systems lead with a 60 percent market share.
Microsoft has been acquiring companies at a constant pace, Ballmer said, at about 20 companies per year. Microsoft typically looks at companies valued at "up to a few $100 million," he added. The Silicon Valley continues to be prime hunting grounds for Microsoft, but noted exceptions, such as recent Microsoft acquisitions in Israel and France.
Ballmer reiterated his message at other events this week.
In Mountain View, Calif. on Thursday, Ballmer told Microsoft Venture Capitalist 2008 attendees a little bit more about Microsoft's software plus services strategy, hinting at a bombshell.
"We'll announce a new operating system, one that runs in the cloud, and has a wide variety of capabilities. That is part of what we'll talk about at our Professional Developers Conference," Ballmer said.
He identified Microsoft's biggest growth opportunity as "the sale of more PCs," saying that it's a $300 million market that is growing at a double-digit rate. "And despite things or including things like the EEE PC and these other kind of low-cost $300, $400 notebooks, the market continues to explode," Ballmer said. China will surpass the United States as the biggest market for buying PCs in two years, he added.
On Friday, Ballmer gave a talk at the Stanford Graduate School of Business, largely about his CEO role. Microsoft now has about 90,000 employees and Ballmer said he has had to rethink his role as the company diversifies its operations.
He runs things now less hands-on, Ballmer said, shaping the activities of "about 300 or 400 people." He said that the No. 1 activity taking up his time is "developing the top talent."
One of the motivating things that Microsoft has been doing is talking with its employees about the company's values and what it is doing. "But we have to talk to our employees these days a little bit about the stock price," Ballmer added.
The company's stock price has been flat for 10 years, which is something typical of large-cap stocks, he said. By explaining stock valuations, Microsoft aims to help its employees get past "a very ineffective day-to-day scorecard" in assessing the worth of the company, Ballmer explained.
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