The Redmond White Knight rode into town last night to cure the markets of their technology downer. At least that was the plan. Last week Intel Corp supplied the hit which gave the markets a bit of a lift before investors remembered that they were supposed to be getting out of technology stocks. But the guys over at Microsoft are not the ones you would call on at times like this to talk a market up. They would never get a job at the Samaritans: and are capable of making a kiddies’ birthday party seem depressing, being notoriously downbeat about their phenomenal success. But they did their best yesterday. The market situation was similarly jittery exactly a year ago when chairman and CEO Bill Gates joked blackly that it was great to have the opportunity to share his fears and nightmares about the business with everyone (CI No 2,712). But he had a right to be nervous back then: it was exactly a month before the launch of Windows 95 and all the uncertainties that surrounded that. No such worries this time. Sure, Windows NT workstation and server 4.0 is imminent, but the take up for that will be more gradual and it is not the seismic shift Gates would have us believe Windows 95 has been. But of course, Windows 95 was at the heart of the company’s profits surge, along with strong growth from OEMs, and success in the far east. Microsoft’s yearly progress report was just about on the button as far as most analysts’ estimates were concerned. The company’s chief financial officer Mike Brown said in April that fourth quarter earnings would be slightly off the $562m posted in the third. And they were, with fourth quarter net income coming in up 52% at $559m against a quarter last time that included a $46m resulting from the abandonment of Microsoft’s proposed takeover of Intuit Inc as revenues climbed 39% to $2,255m. For the year, earnings were up 51% to $2,195m as revenues soared 46% to $8,671m. Although now Microsoft has now come of age at 21 years old, Greg Maffei, company treasurer said the company has grown like a gangly teenager this year, which is, of course how the Redmonders all started. CFO Brown was trying to sound a lot more happy with his lot than usual and he did his best to convince. Cash flow is growing stronger than earnings, earnings are growing faster than revenues and sales and marketing costs are growing slower than revenues, he said. It’s a CFO’s dream! he gushed. He confirmed that he was more excited than usual, but I’m serious about the caution, he added sternly. His main area of caution was about un-earned revenues being higher in fiscal 1997 than they were in 1996, due to the increased amount of revenues coming after the shipment, a trend that’s likely to continue, given the company’s contraction of Internet fever. And that’s after they soared from just $54m in 1995 to $560m in the fiscal just ended. But it is Brown’s job to make investors and analysts feel secure. And so he aimed to reassure them by saying that although 1996 was a move away from traditional Microsoft strengths of shrink-wrapped software, and things are now happening in Internet time, on conservatism, we are trained up and ready. He summed up the cultural dichotomy as shrink-wrap boxes versus on-line living. Research and development continues to rise as a percentage of revenues, up from 14.5% in 1995 to 16.5% this time, but Brown doesn’t mind despite it growing significantly faster than revenues, up 166.5% on 1995. In terms of product groups, platforms represented 47% of sales, up 7% on last year, while applications and content fell by the same margin to 53% of sales. These moves were largely due to the introduction of Windows 95 and users holding off for Office 97. In the quarter, the ‘other expenses’ line shot up as a result of the launch of MSNBC Cable and Interactive, and the Dreamworks Interactive Inc joint venture: a lot of fun, but pretty expenses, Brown called them. The much-altered Microsoft Network failed to break even in the year as Brown had hoped, costing the company about $100m, and Brown wouldn’t make a prediction for this time, other than it wouldn’t break even again. Microsoft closed down $1.23 at $119.75 yesterday before the numbers came out. Brown concluded in typical fashion: financial conservative I may be, but I’m also the most excited I’ve ever been about Microsoft. And that’s probably saying something.
