Although Microsoft ( MSFT) is betting heavily on its Longhorn operating system -- still some two years away -- company bulls are counting on a menu of other products to drive growth in the interim.

But are these offerings meaty enough to help Microsoft's shares lose their recent reputation as a straggler?

The company's stock has slumped nearly 4% from a year ago vs. a 1.7% rise in the Goldman Sachs Software index. The shares haven't broken the $30 mark since March 2002, stubbornly eluding analysts' one-year price targets that reach as high as $35.

Longhorn, the next version of the company's flagship Windows operating system, has been hailed as the likely driver of Microsoft's largest upgrade cycle ever.

Last month, the company put to rest speculation about its launch date by announcing that the new desktop operating system will be released in the second half of 2006 and that the new server OS will be released in 2007. That was earlier than conjectured in the trade press, perhaps because Microsoft had to drop an often-touted, new file system to meet the date.

"Everybody is making a big thing about Longhorn, and it should be a big thing because that's the next big OS," said David Hilal, an analyst with Friedman, Billings, Ramsey & Co. But "there's a slew of intermediate products coming out, which I think in aggregate are pretty solid." (Hilal, who projects 5% top-line growth for Microsoft next year, has an outperform rating on the stock, and his firm hasn't done any banking with Microsoft.)

The releases slated by Microsoft between now and Longhorn include:
  • a 64-bit version of Windows Server, which has been delayed to the first half of 2005;
  • a new version of Microsoft's SQL Server database software, code-named Yukon, coming in the first half of 2005;
  • Visual Studio 2005, the next major release of Microsoft's development platform, to be rolled out with SQL Server next year; and
  • the next-generation Xbox console, rumored to be hitting shelves by the 2005 holiday season.

Those touting Microsoft say the company's server business -- which represented 23% of total sales last year -- will continue to help the world's largest software maker post steady growth until Longhorn arrives. Last year, the server business posted the biggest percentage sales jump of Microsoft's largest business divisions.

"It's still the server story," said Transamerica Investment Management fund manager Chris Bonavico, who holds Microsoft shares. "That's continuing in the midteens growth range."

Updates to Microsoft's Windows Server 2003 product are expected to help push growth. "The 64-bit version of Windows Server 2003 is really going to be a big driver over the next one to two years," Hilal said, citing the thirst among customers for 64-bit processing, in which applications process 64 chunks of data at a time vs. the current 32-bit processing standard. The product is in beta testing and scheduled to launch by the end of the year.

Yukon, the next version of SQL Server, will offer business intelligence tools and better security, Hilal said. (Microsoft doesn't break down sales for the SQL Server, although analysts have pegged them at 5% of total company sales and as also growing into the teens).

However, Matt Rosoff, an analyst with independent research firm Directions at Microsoft, disagrees that the next version of SQL will be an immediate revenue generator. "It doesn't usually work like a consumer release where a product comes out and suddenly everyone buys it," Rosoff said. Installing a new version of SQL Server isn't easy, and customers considering the move may already have paid for a subscription that entitles them to the new version, he added.

But longer term, Rosoff believes that the SQL Server combined with the launch of Visual Studio.Net next year will be important to Microsoft's promotion of its platform over others such as Java, as the company aims to take share from Unix and not lose share to Linux's open-source software.

Instead, Rosoff believes that already released versions of Office and Windows will remain Microsoft's main sources of growth for the next couple of years. "It's not a whole lot of new stuff; it's just getting people onto the current generation and effectively selling the current products," Rosoff said. "Getting consumers and businesses to upgrade to Windows XP and getting people on Office 2003 are really important."

Indeed, research firm Gartner estimates that more than 60% of Microsoft's Windows customers worldwide are using a version older than XP, the latest release. Meanwhile, a Gartner survey last year of U.S. medium and large businesses found that 60% of 1.6 million users represented were still using Office 2000, one version behind Office XP.

"They're their own biggest competitor in terms of the products," Michael Silver, a VP in Gartner's client computing group, said of Microsoft.

But Charlie Di Bona, an analyst with Sanford C. Bernstein, disagrees about desktop software sales driving interim growth before Longhorn. He argued that Microsoft may even see its Windows and Office desktop business pull back in the next fiscal year as people await Longhorn's release. (He has an outperform rating on Microsoft and his firm doesn't do investment banking, but its parent, Alliance Capital, holds Microsoft shares.)

Rosoff and Di Bona agree, however, that Xbox video-game console sales could be a meaningful top-line contributor if Microsoft launches a new console next year, as widely rumored. Because Microsoft's Xbox was later out of the gate than rival Sony's ( SNE) PlayStation 2 console in 2001, many industry observers believe Microsoft may try to be first in the next round of console wars .

Microsoft's home and entertainment division revenue, primarily made up of Xbox sales, totaled $2.9 billion in fiscal '04, representing nearly 8% of total revenue. But Xbox sales have slowed because of price cuts, which are typical at this point in the video-game console cycle. And those price cuts put an additional squeeze on the bottom line, increasing Microsoft's operating loss in the home and entertainment division by 2% in fiscal 2004.

Bonavico believes that Xbox will become profitable within the next 12 months, although Microsoft CFO John Connors said in July that Microsoft's home and entertainment business could be profitable in fiscal '07, which begins in July 2006.

However, a less bullish Microsoft investor, Marc Klee, a portfolio manager with the John Hancock Technology Fund, believes that Xbox alone isn't enough to tide the company over until Longhorn.

With 61% of Microsoft's revenue coming from Windows and Office sales, Klee believes that only growth in those areas can really create meaningful top-line growth. "If they get more into the gaming area, it's just not going to move the needle," he said.

"I think they're really going to be a modest growth company until that Longhorn happens," Klee added. "From a product road map standpoint, there's really very little to give the top line kick."

That talk, increasingly common among tech investors, is what makes Microsoft bulls bristle.

"What you have is a company that is fundamentally undervalued because of concerns of growth potential, Linux and Xbox -- all of which are overblown," Di Bona said. The stock, he added, has fallen into "limbo land" between traditional growth investors and value investors.

"If you believe markets are rational, then people will come to the realization that while it's paying dividends, it's still growthy," Di Bona concluded.

That realization is contingent on whether investors can make a meal out of what Microsoft brings to the table.

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