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Windows 98 delayed

The new Microsoft operating system is now scheduled for second-quarter 1998 release. CFO Gregory Maffei warns that growth will slow.

Microsoft> (MSFT) is delaying the release of its Windows 98 operating system, a move that already has caused the company's stock to drop.

Microsoft stock dropped 7-1/4 to 130-11/16, from Friday's close of 137-15/16. The stock hit its all-time high of 150-3/4 prior to its last earnings announcement in July, but since then has lingered in the 130s to 140s range.

Microsoft said its Windows 98 operating system will not be released until the second quarter of 1998. It previously was scheduled for a first-quarter 1998 release. The new version of Windows integrates Internet Explorer 4.0 and other Web-centric features into the operating system.

The need to supply an upgrade for both Windows 3.1 and Windows 95 users in one box is what has caused the delay, said Phil Holden, product manager for the Windows group. Originally, the Windows 95 upgrade was to be released in the first quarter of 1998, and then, three to six months later, the upgrade for Windows 3.1 would become available.

Pressure from channel partners such as Egghead, as well as business customers, altered Microsoft's plan. "The result is that we will have to do additional testing and that will move us to Q2," said Holden. "There will now be one upgrade for all Windows users, and that takes additional time."

This is not the first time that the product release date has been pushed back. Early reports said the operating system was expected to be out by November, but the ship date then was pushed back to the first quarter of 1998.

Microsoft CFO Gregory Maffei told investors at the company's annual financial analyst meeting in July that they should not expect Windows 98 to drive the same type of revenue growth that recent OS upgrades have.

"Only in years when we have blockbuster releases have we had growth rates well over 25 percent," Maffei said. "None of us is projecting Windows 98 to be a blockbuster like Windows 95. It?s an important upgrade, but it won?t have the same financial impact."

Maffei noted that the "first and foremost" source of Microsoft's problems next year will be a drop-off in PC shipments as a result of the company?s saturation of the desktop software business.

Microsoft also said there will be fewer chances to cut expenses in the future, given its plans to boost research and development spending to $2.6 billion in fiscal 1998, from $2.2 billion in the fiscal year just ended. The company plans to increase spending in both research and development and sales and marketing despite the lack of marketing enthusiasm Windows 98 has received. Microsoft said it will not push Windows 98 with the same hype that it pushed Windows 95.

The Windows 98 postponement comes on the heels of Maffei's quote in the September 15 edition of Barron's in which he said the company was "very leery of [the stock's] current valuation."

Barry Randall, an analyst with Dain Bosworth, said that Microsoft has made these kinds of comments before. And yet, the company keeps growing. "Maffei said the same thing two months ago," Randall said. "He thinks the stock is too high and they have been saying so publicly and privately for some time."

"The company is very forthcoming to the financial community about its financial prospects," Randall added. "It tries to give as much guidance as it can, but it is a bit hazier about when products will be released."

Randall maintained that "[Microsoft] is still the right horse to ride." It is okay for Microsoft to trade at a premium, he added, because it has a 20-year track record of living up to expectations. Current stock market prices indicate the company is worth $181 billion, according to Barron's.

Randall said that Microsoft stock will rattle around for the next six months, but the company's future is hardly in doubt. "Every time you think it is overpriced, it goes up again," he said, noting that this security will continue trading at a premium. "You get what you pay for...If you are willing to endure higher valuation and the possibility that it will fall in the short term, you'll be rewarded in the long run." Randall.

Maffei qualified such long-term flag-waving. "It doesn't serve the interests of long-term investors when the price gets out of whack," he said. While Maffei declined to make specific earnings projections, he said Microsoft's revenues will be lucky to grow as fast as the market for personal computers over the next 12 months.

That translates to a growth rate of 15 to 20 percent, well down from the 55 percent growth Microsoft experienced last year and the 43 percent growth it experienced the previous year, Barron's said.

"We just don't have any new blockbuster products coming to market," Maffei told Barron's.

Reuters contributed to this report.