Microsoft's profit surge continues

The software giant beat analyst expectations for its fiscal fourth quarter by four cents on the strength of sales of its Office 2000 suite of business software, the company's server-based corporate programs, and Windows NT Server operating system.

Microsoft reported fourth quarter earnings of $2.2 billion, or 40 cents per share, on revenue of $5.76 billion.

For the year, Microsoft posted a 69 percent year-over-year increase in earnings, reporting income of $7.79 billion, or $1.42 per share, on revenue of $19.75 billion.

Consensus analyst expectations compiled by First Call pegged the company's fourth quarter earnings at 36 cents per share and fiscal year earnings at $1.35 per share.

But Microsoft executives cautioned that the company's profit juggernaut could be hampered in the coming fiscal year. Greg Maffei, Microsoft's chief financial officer, said fiscal 2000 growth would decline to the "high teens" from 29 percent for fiscal 1999.

Striking a typically conservative tone, Maffei cited slowing PC demand, uncertainty surrounding Y2K, and uncertain global economic conditions as reasons for the estimate.

Maffei encouraged the financial community to "hold earnings estimates constant" for the coming fiscal year.

Even with a recent slew of high-profile investments, like the company's recent $5 billion stake in communications provider AT&T, Microsoft closed its fourth quarter with $17.2 billion in cash on hand. Its equity and related investments now total $14.4 billion.

The SEC and accounting changes
About $200 million of revenue related to Office 2000 had been pushed to the fourth quarter from the third quarter, as a result of a coupon upgrade program.

This practice of moving revenue from one quarter to another prompted the U.S. Securities and Exchange Commission to probe the firm's accounting practices earlier this year, Microsoft said last month.

The SEC review likely also encompasses the manner in which Microsoft sets aside reserves for items such as returned software or delayed and undelivered upgrades. In a larger context, the items relate to the company's accounting procedures for so-called unearned revenue.

Given the company's complex licensing agreements and upgrade caveats with customers, revenue is at times accounted for over the life of the agreement. The company has billions of dollars in unearned revenue tucked away in liability accounts until it can be shifted to an earned revenue account and reported as earnings. For example, in its fiscal third quarter, the company reported $2.06 billion in unearned revenue for its "platform" products, or Windows operating system software.

In addition, the company accounts for portions of its business differently.

The disclosure of the SEC probe in fact came during a company conference call last month to review changes in accounting procedures. In one change, the MSN Access Internet business will count toward revenue and costs. It was previously accounted for as a part of the company's research and development expenses.

Also, the company's consulting, product service and support, and certified professional training---once accounted for as part of the company's sales and marketing costs---will count toward the bottom line as well.