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Glowing MS figures mask major revenue decline

Up on last year, but compared to Q2 they're not so clever...

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Microsoft will get the headlines it wants today: how it "beat the Street", or "exceeded (financial) analysts expectations", but the truth about Microsoft's third quarter results yesterday is a little different. Companies like to compare results with those of the year-earlier quarter, using the argument that seasonal factors make this more desirable. Indeed, comparing Microsoft's year-earlier quarters since 1989, there are no quarters that were lower than the year-earlier quarter for revenue or earnings. But product cycles are far more important for Microsoft than seasonal factors, so it is worth looking at Microsoft's results sequentially from one quarter to the next. If we do this, what emerges is a quite different story from the one being told elsewhere today. Comparing year-ago quarters, Microsoft's net income is up 40 per cent, and revenue up 15 per cent. That sounds good for shareholders, and bad for Microsoft's desired persona in court as a hard-pressed company trying to turn a profit in the face of tough competitors. It's also further good evidence for the DoJ, since the profits look suspiciously like monopoly profits. The net margin went up to 44 per cent from the year-earlier 35 per cent, which should help the DoJ's arguments in court. But if you compare what happened in the sequentially-previous quarter, the picture is very different. So far as revenue is concerned, there was a 12.3 per cent decline from quarter two to quarter three - only the sixth time this has happened in 39 quarters, and by far the greatest decline in terms of actual money ($607 million). So far as earnings are concerned, there have been nine quarters in which results have been sequentially down. For the quarter just reported, the decline in earnings is 3.3 per cent ($66 million), although this was not as bad as the quarter ended 30 September 1997 when earnings were down sequentially 37 per cent ($394 million). Looking at Microsoft's unaudited results announced yesterday, the much-vaunted R&D expenditure was up only 2 per cent, even compared with the year-earlier quarter. Legal cost increased more than R&D: the exact amount cannot be determined precisely from Microsoft's data, but the increase was something less than $40 million, it would appear. It is comforting to know that Microsoft will be paying income tax of $1.032 billion for the quarter. So far as cash and short-term investments are concerned, Microsoft had $21.761 billion at 31 March. It is becoming increasingly hard to find ways of putting this vast money pile to use, beyond obtaining some interest on it. If Scott McNealy's suggestion to The Register were followed, Microsoft would not be allowed to spend it on acquisitions. Even so, the regulatory hurdles that Microsoft would face with any major acquisition attempt would be severe, because competition is likely to be diminished if a major acquisition is allowed. Revenue was up in all geographical regions, and for OEMs. Even Asia managed a 22 per cent upturn in revenue, comparing the year-earlier quarter. During the quarter, there was an investment gain of $350 million. The non-delivery of Office 2000 caused $400 million of revenue to be deferred, probably to the next quarter. Microsoft patted itself on the back for "a fabulous start" to SQL Server 7 sales, which increased "more than 50 per cent" over the year earlier quarter (but that's nothing to shout about since Dataquest is predicting Microsoft might get 10 per cent of the market this year, significantly behind IBM's DB2 and Oracle). Microsoft really has advanced the art of presenting financial results to get the greatest spin. The fact that financial analysts estimates are always beaten by a few pennies (First Call suggested 32 cents/share, and the result was 35 cents/share) suggests that Microsoft may be making some last-minute decisions about what earnings to declare in its unaudited accounts. A true assessment of the future should be that Windows 2000 is Microsoft's greatest gamble ever, and that it is unlikely to achieve the level of acceptance that Microsoft desires. As The Register has pointed out more than once, the Windows roadmap is in tatters. Six months after Windows 2000 is actually released, the disastrous financial consequences are likely to be visible to all. ®

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