Microsoft sees stronger XP sales in FY08 -- yes, XP

It will account for 22% of sales in the next year, more than first predicted

Microsoft Corp. yesterday said that it expects Windows XP, the operating system supposedly made moot by Windows Vista, to make up a significantly larger part of sales in the coming year.

During a conference call with analysts following the earnings results release yesterday afternoon, Chief Financial Officer Chris Liddell said the company has changed its fiscal year 2008 forecast from an 85/15 split in sales between Vista and XP to a 78/22 split. Windows XP sales will, in other words, be nearly 50% higher in the next 12 months than Microsoft had estimated earlier.

"We fine-tuned the Vista/XP mix for next year" during the company's usual budgeting last month, said Liddell. "We changed it from 85% to 78%. Now, it's a lower number [for Vista], but it's still a very high number overall from our perspective, so 78% Vista mix in terms of sales next year."

According to Liddell, Microsoft will generate the same revenue, more or less, under the new Vista vs. XP numbers, although there might be some slight differences because Vista sales have tended to involve more of the higher-priced versions, dubbed premium by the company, than has XP. The financial forecast didn't spell out that directly, however. The only clue was a $120 million difference in what Microsoft pegged as the "undelivered elements" it assigned to unearned income for the coming year.

"Undelivered elements" are revenue set-asides to account for as-yet-unknown upgrades and enhancements to software. The set-aside shrunk from $660 million in the last 2008 forecast to $540 in the estimate presented yesterday.

"Because of that change [in the operating system split], then the amount of undelivered element that comes from Vista is slightly lower than it would be otherwise," Liddell explained.

His remarks caught the attention of Michael Cherry, analyst at Directions on Microsoft, a Kirkland, Wash.-based research company. "What that seems to say is that XP has stronger legs than you would expect after the release of a new operating system."

Clues that users aren't ready to ditch XP have not been hard to find. In April, for example, Dell Inc. retreated from its earlier Vista-only position and announced it would return XP to the operating system choice list for consumer PCs. Three months before that, Microsoft extended support to Windows XP Home and XP Media Center to match Windows XP Professional's drop-dead date of April 2014.

"Most of the machines I see pitched in catalogs are in the $700 range, certainly under $1,000," said Cherry. "Computers with that amount of hardware are a better fit for XP. With Vista's requirements, people may be thinking about sticking with XP, and putting less money into the hardware."

It's possible, Cherry added, that Microsoft might find itself forced to recognize more reality in the future. "At some point, they might have to consider limiting the availability of XP" to push people to Vista.

The software developer has made at least one move in that direction already. In mid-April, it announced it would terminate sales of Window XP to resellers and retail after Jan. 31, 2008. Users' reactions were almost unanimously negative

Copyright © 2007 IDG Communications, Inc.

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