Of Profits and Perception at Microsoft

Couched as it was with the news that Microsoft has already sold more than 32 million copies of Windows XP, the company's quarterly earnings announcement late last week caused confusion, even for seasoned financial analysts. The company posted a strong profit ($2.74 billion, an increase of 12 percent year-over-year), but for the first time, Microsoft's revenues--$7.25 billion--fell short of analyst's expectations of $7.34 billion. To add to the problem, Microsoft said that earnings for the next two quarters will fall short of previous estimates.

The news sent Microsoft's stock on a rollercoaster ride Friday; the price finally settled in the high 50s. But after sorting through the company's earnings report this weekend, analysts aren't so sure that all is well with the company. And at least one analyst is charging that Microsoft's revenues are deceptively high because of an accounting change that suddenly--and silently--made the company realize previously unearned income this quarter and an $800 million one-time gain from the sale of the Expedia online travel site.

Also troubling for the company is its Xbox game system, which is experiencing weak sales in Japan, Europe, and Australia. Microsoft had previously said that the Xbox would sell 4.6 to 6 million units in its first year of availability but has now revised that figure to 3.5 to 4 million units. And enterprise spending is almost flat, year over year, affecting a crucial growth area for the company, which now sells a variety of server-related products. Likewise, Office XP sales are said to be far lower than expected.

The one bright area in all this is Windows XP. Despite flat or slow-growing PC sales, XP has sold better than any previous Windows version, and its 32 million sold copies--split between retail boxes and new PC bundles--in just 6 months is a major milestone and user endorsement. More amazing, perhaps, is that XP has sold just about as well since the beginning of the year as it did during the 2001 holiday season; generally, sales fall dramatically in this time period. The business version, XP Professional Edition, accounted for about 47 percent of all XP sales; the Home Edition presumably took up the remaining 53 percent. And XP is now preinstalled on 60 percent of all new PCs, the fastest adoption rate ever for a new Windows version.

So is Microsoft still an economic powerhouse, or is the company on cruise control? The answer will be more obvious in about 6 months, when we find out whether the economy recovered and as Microsoft finally completes crucial late 2002 products--Mira, Freestyle, XP Service Pack 1 (SP1), and Windows .NET Server.

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