No Surprises in Microsoft's Annual Report

Digestingthe information in Microsoft's annual report for fiscal 2000 shouldn't requireany antacid for stockholders. It's a typically vanilla financial picture with acherry on top.

Asexpected, there were impressive profits reported by Redmond for the year thatran from June 1999 to June 2000. As expected, the company says it will continueinvesting in initiatives aimed at the .NET platform. And as expected, myriadlawsuits, including one likely to wind up before the US Supreme Court, are notanticipated to change the charted course.

Previous tothe release of the annual report, the software giant announced new reportingguidelines that will be implemented for the first quarter of the new fiscalyear. Microsoft will now break down its results into five company segmentsrather than its traditional four as an effort to comply with Rule 133 of theFinancial Accounting Standards Board.

In the viewof IDC industry analyst Dan Kusnetzky, all this compliance does is to giveMicrosoft more room to massage its numbers to its best interest.

"Essentially,it makes it more difficult to determine what's actually happening in theirbusiness," Kusnetzky says. "Revenues are things they'd like to movearound to meet people's perceptions. There's really no way to cross-referenceitems and examine them in detail. There's no way to know what's successful andwhat's not."

Microsoft'srevenue for fiscal 2000 was reported at $22.97 billion, a 16 percent increaseover the previous year. The licensing of Windows 2000 releases prompted themajority of the growth. Microsoft enjoyed a 29 percent revenue growth in fiscal1999, and 28 percent the previous year. Net income for the fiscal year was$9.42 billion, up from $7.79 billion in 1999.

The companybusiness model continues to shift from selling packaged products to licensingorganizational licenses and subscriptions, again in line with it's .NET push.There's also a move away from its distribution model where more products arebeing shipped directly to OEMs and end users rather than being filtered throughthe company's distributor network. This brought the company about a $250million savings for the fiscal year.

Microsoftpromised significant investment in .NET initiatives in terms of its Windowsplatform. Kusnetzky believes the .NET rollout is little more than a marketingploy. He says what Microsoft doesn't tell users is that they probably alreadyhave the .NET pieces they'll need.

"It'slike the 'Batman' movie, where the Joker takes over a cosmetics factory, slipsa poison into the components, and then people develop a Joker's white face andsmile before it kills them," Kusnetzky says. "He goes on TV and sayspeople may ask how to get these components, and they'll be surprised when theyfind out they already have them. It's the same with Microsoft .NET. It'sslipped out in pieces. If people follow the upgrade paths they have in thepast, they'll be ready for the first applications. When it's time to turn iton, clients already will have what they need to support it. It's an interestingstrategy that many system vendors have used for years."

Thesoftware giant does have its share of legal woes to consider, primarily theantitrust action brought on by the US Department of Justice. Microsoft is appealinga US District Court judgment that calls for the company to be divided into two.It's now before the US Court of Appeals of the District of Columbia, where thecompany expects a reversal of the judgment. This case is likely destined for afinal ruling in the Supreme Court. Microsoft remains confident that it is notin violation of antitrust laws.

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MicrosoftCorp., Redmond, WA,
IDC, Framingham, MA,