http://quote.bloomberg.com/apps/news?pid=10000103&sid=azwonXtm0RWY Microsoft's Sales Growth Limited by Delays in Windows Upgrades May 7 (Bloomberg) -- Microsoft Corp.'s sales growth will probably drop below 10 percent next fiscal year for the first time because delays in the next version of Windows have created the longest-ever lag between releases of the software. Windows is the largest contributor to Microsoft's revenue, providing about a third of annual sales. The new version won't arrive until 2006, almost five years after Windows XP, the company said. That means sales growth will slow to as little as 3.4 percent, according to Microsoft's forecast. ``Microsoft is facing more competition and more issues than ever before, and it is having to make strategic decisions at the expense of growth,'' said Robert Mattson, a Philadelphia-based analyst at Gartmore Global Investments, which owns $158 million worth of Microsoft stock. Windows chief Jim Allchin this week showed a test version of the next program at a conference and touted features he said will help Redmond, Washington-based Microsoft fend off rivals such as the cheaper Linux software. The lag has left clients such as Charles Schwab Corp. with few reasons to upgrade next year. Geoff Penney, who makes software-purchasing decisions at Schwab, will buy 20,000 copies of Windows by the end of this year. He won't add a single one next year or the year after. ``We'll be done for a few years,'' Penney said in an interview. He wouldn't give the value of the deal; analysts Toni Duboise at Current Analysis Market Intelligence and Steve Trotta at Technology Business Research estimated it at $1.8 million. Shares of Microsoft, the world's biggest software maker, have lagged as growth slowed. They have dropped 4.6 percent this year after rising 5.9 percent last year and declining 22 percent in 2002. They fell 18 cents to $26.12 yesterday in Nasdaq Stock Market composite trading. Product Delays Windows runs 93 percent of the world's personal computers. Microsoft on April 1 delayed an expected test version of the next Windows, codenamed Longhorn, until next year as the company diverted engineers to fixing security problems in Windows XP. Microsoft also is releasing some additions to XP this year, Chief Financial Officer John Connors said. ``The overwhelming majority of PCs are not running Windows XP and the opportunity is quite good for the Windows XP product wave ahead of Longhorn,'' Connors said in an interview in April. XP, the software Penney is putting on Schwab's computers, helped Microsoft increase revenue an average of 13 percent over 2002, 2003 and estimates for 2004. Analysts on average expect Microsoft's sales to rise 14 percent to $36.5 billion in the year ending in June, according to Thomson Financial. Sales of Windows for desktop PCs will grow 8 percent next year, down from 11 percent this year, said Rick Sherlund, a Goldman, Sachs & Co. analyst in New York who's followed Microsoft since Goldman handled its initial public offering in 1986. Backlog Plunges Microsoft in March also postponed a new version of its database software, SQL Server, until the beginning of next year. The lack of new products also hurts multiyear subscriptions, because clients that buy the contracts expecting to get product upgrades may not renew if new items won't be available for a while, investors and analysts said. ``The delay in Longhorn and the delay in SQL Server plants a question in my mind as to what people are supposed to subscribe to,'' said Tony Ursillo, an analyst in Boston at Loomis Sayles & Co., which has $54 billion and owns 250,000 shares of Microsoft. The value of long-term software contracts will fall to $7.8 billion this year from about $9 billion last year and won't grow next year, Sherlund said. Connors, 45, in January said no more than 30 percent of customers that signed up for two-year contracts in 2002 would renew in calendar 2004. Opportunities Chairman Bill Gates compares Longhorn to Windows 95, with big advances in capabilities from previous versions. Windows 95 drove a 26 percent rise in PC unit shipments in 1995, the biggest ever and the only time an operating system boosted PC purchases, said IDC analyst Roger Kay in Framingham, Massachusetts. Longhorn will change the way PCs represent files such as documents for the first time since 1996, to make it easier for users to search. It also will make it easier for companies to write programs that let people share data across normally incompatible devices. Connors said in an interview that the company needs to cut costs to make up for sluggish sales growth until Longhorn is done. Still, he said the new functions will help boost sales of both Windows operating systems and Office word-processing and spreadsheet programs later on. ``There's so darned many opportunities for what we can do that we don't think we've tapped yet,'' Connors said. `Something Drastic' Features are key as Microsoft seeks to prove its programs can do more than the Linux operating system, which is distributed for free over the Internet, he said. Operating-system shipments will increase 2 percent to 3 percent a year from 2003 through 2007, less than other types of software, IDC said. Microsoft has said shipments of Linux for server computers that run networks will grow more than twice as fast as Windows in the year ending June 30. Linux sellers are starting to release PC products to take advantage of the delay in Windows. Companies such as Hewlett-Packard Co. have said they'll sell Linux PCs. Linux represented 23 percent of server software shipments in 2002, according to IDC, the latest year for which data is available. Windows shipments accounted for 55 percent. Microsoft may drop some of the changes to Longhorn to make sure it can ship the product on time, Goldman's Sherlund said. Longhorn will go on sale in the first half of 2006, said Matt Pilla, a senior product manager at Microsoft. The company doesn't plan to leave out features to release the program sooner, Pilla said. ``There may be some minor scaling back'' of some functions, he said. Microsoft has to focus on big changes as the market's growth slows, said Michael Sansoterra, an analyst at Principal Global Investors in Des Moines, Iowa. His firm manages $118.5 billion and owns Microsoft shares. He doesn't plan to buy more. ``There's no way to make a company of Microsoft's size grow without doing something drastically different,'' Sansoterra said. To contact the reporter on this story: Tiernan Ray in New York, or [email protected] To contact the editor responsible for this story: Cesca Antonelli at [email protected] Last Updated: May 7, 2004 03:05 EDT -- Diego Saravia [email protected]