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MS takes $400m hit to cover Office 2000 delay

Shifts upgrade income from Q3 to Q4

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Microsoft is deferring the recognition of $400 million of revenue because of the delay to Office 2000. This means almost certainly that the revenue for Microsoft's third quarter ending 31 March will be its biggest sequential decline in its history: down to $4.2 billion from $4.65 billion. A panic conference call with financial analysts was arranged at short notice yesterday afternoon when CFO Greg Maffei broke the news. Purchasers of Office 97 in recent months have been given a free update coupon, but with no product Microsoft cannot recognise the revenue from these punters this quarter, so it must carry forward a liability for what they have paid. Accounting 'rules' allow enormous flexibility in determining just how much revenue can be deferred or recognised, and Microsoft has been very astute at playing the game to even out its income. Office accounted for about a third of Microsoft's revenue in the last financial year. Microsoft has so successfully tuned its ways of controlling analysts' expectations to such an extent that the SEC has been sniffing around. Have you noticed how the only headline that Microsoft wants about its results is 'Analysts expectations exceeded'? Microsoft's concern yesterday was to reassure the Street that there was no reason to worry about the Office 2000 delay because the revenue could be recognised in the fourth quarter. After the bell, Microsoft shares fell as a result, but not the 19 per cent that Oracle dropped after a disappointing earnings report. There had been nervousness following Dell's revenue not meeting expectations last month. Without any supporting evidence, during the call Maffei hinted at greater than expected investment income. Nobody asked what kind of tap could be turned on to get an extra $400 million all of a sudden. Maffei also claimed that the "seasonal trend" (jargon for falling sales) was as expected. Maffei said that Office 2000 would be released to manufacturing by the end of March, and be available next quarter. In the US and Europe, many OEMs have been reducing inventory before shipping Pentium III machines, and there is some evidence that the channel was over stuffed by OEMs in December. This could result in Maffei having to whistle another tune on 19 April when Microsoft's results will be announced. ® Complete Register trial coverage

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