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Microsoft to Pump Up R&D, Hire 5,000 Thu Jul 25,11:43 PM ET

By Reed Stevenson

REDMOND, Wash. (Reuters) – Microsoft Corp. said on Thursday it would boost spending on research and development by 20 percent and hire nearly 10 percent more workers this year, buoyed by strong sales of Windows XP ( news – web sites).

Bill Gates ( news – web sites), Microsoft’s chairman and chief software architect, said the software giant would make “aggressive” investments as it prepares to bet the company’s future and its mainstay, the Windows operating system, on Web-based services.

“We are increasing the level of investment for the future,” Gates told a gathering of about 300 analysts and reporters.

Gates said the software giant would increase research spending by 20 percent to $5.3 billion and add 5,000 employees to its workforce of 50,500 for the current year that ends in June 2003.

Thousands of new workers and billions of investment dollars are needed to deploy .NET, Microsoft’s over-arching plan to transform the way information changes hands so that software and services no longer depend on individual computers, Gates said.

Although Microsoft announced that Windows XP, the latest version of its flagship operating system, sold 46 million copies, to become the company’s fastest-selling software ever, the company emphasized repeatedly that it needed to branch out into new areas.

Analysts said Microsoft’s aggressive push into the nascent market for Web-based services was risky, but agreed that the potential rewards were also rich.

“I think it’s a huge bet. If they can get businesses to publish Web services that quickly I think they’ve got a bright future,” said Kim Caughey, an analyst at investment firm Parker/Hunter Inc. who attended the briefing.

Shares in Microsoft lost about 7 percent on Thursday, closing at $42.83, down $3.40, on the Nasdaq in a volatile session.

THE ‘NOW WAVE’

In his presentation, Gates outlined Microsoft’s strategy over the next few years, saying the company would look to migrate customers over to Web-based computing and services in three phases over the next several years.

The first phase — which he called the “Now Wave” — would center around new consumer-oriented software to be released this fall, including a new media-friendly version of Windows XP, the Tablet PC and a beefed-up browser for online service MSN, as well as a new server and updates for .NET infrastructure.

The second wave would be marked by the release of Microsoft’s database SQL Server, code-named Yukon.

“It will be a period of a modest number of releases,” Gates said.

The third and final phase will be marked by the next overhaul of Windows, a project recently code-named Longhorn, that promises to work seamlessly with .NET, Gates said.

Microsoft has long recognized the need to make itself less dependent on cyclical sales of personal computers and move into software for a wide range of devices, including cell phones, hand-held devices and interactive television.

RISKY BETS

Gates reaffirmed these efforts on Thursday, repeatedly emphasizing the long-term approach that Microsoft is taking while reminding analysts that it was willing to make big, risky bets to move its software away from the desktop and into living rooms and people’s pockets.

“Ten years ago I said (interactive TV) was important,” Gates said. “Ten years later I still say it’s important. How much money have we made? A big negative number.”

The meeting with analysts came a week after the No. 1 software company reported results for its June-ended fiscal year showing a 7 percent gain in annual earnings on a 12 percent rise in revenues.

Growth in sales of its latest platform, Windows XP, and software for businesses was offset by write-downs on investments in the cable industry in the fourth-quarter.

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