Update: Microsoft sees slower growth ahead

Larry Dignan
4 min read

Microsoft CFO Greg Maffei said it several ways on Monday's conference call, but ultimately, his outlook for fiscal 2000 came down to a simple warning:

"Our revenue is not going to grow as rapidly as it has over the last five years."

The world's largest software vendor is known for its caution in forecasting; executives constantly tell analysts and investors not to expect Microsoft to maintain high rates of growth. Then the company does it again, to the tune of 31.6 percent average annual growth rate over the last six years, including the just-ended fiscal 1999. But previous warnings have told investors that growth will slow someday; Monday's caution said someday has arrived.

During the unusually long and detailed conference call -- "We think we set the world land conference call record" for its length prior to the question-and-answer session, Maffei joked -- the CFO told analysts to expect fiscal 2000 revenue growth in the high teens, with the first quarter down sequentially because of seasonal slowness. For the full fiscal year, Microsoft expects product revenue growth along these lines:

  • Desktop operating systems.
  • Less than a third of the growth seen in fiscal 1999, which saw the launch of Windows 98. That strong predecessor, Maffei said, will combine with concerns over Y2K computer problems, delays in purchasing as customers wait for Windows 2000, and a slowing overall growth rate for PC sales to hurt platform desktop sales.

  • Desktop applications.
  • "Moderate growth in the high single digit range," Maffei predicted, citing price pressure, market saturation and the law of large numbers as reasons for the slow down.

  • Server applications
  • Continued strong growth in the 40-plus percent range.

  • Commerce and content.
  • The division, which includes Microsoft's online properties, should see revenue growth around 75 percent year-over-year, Maffei said. For the Internet business, Microsoft is considering several investment prospects, which could include a tracking stock. "We are open to lots of interesting and winning partnerships and structures," Maffei said.

    Microsoft's businesses in developer applications and hardware and consumer software should see "moderate" growth, Maffei said.

    Don't expect profit margins to get better in fiscal 2000, Maffei said. "We've cleaned up and improved so much of the cost of revenue ... and that game is kind of up on the software side," he said. "The easy money has been made there. We're against the hard things going forward."

    Analysts should keep their fiscal 2000 earnings estimates consistent with Wall Street's current consensus, Maffei said. First Call's survey of 27 analysts predicts a per-share profit of $1.53 -- about 10 percent growth -- for the full year.

    Microsoft Corp. (Nasdaq: MSFT) topped Wall Street estimates with fourth quarter earnings of $2.2 billion, or 40 cents a share. Wall Street was expecting earnings of 36 cents a share.

    In the fourth quarter, sales were $5.76 billion, up 39 percent from the same quarter a year ago. In the fourth quarter a year ago, Microsoft earned 25 cents a share.

    That fourth quarter's revenue growth rate of 39 percent is impressive on paper. But Maffei noted excluding certain events that don't normally happen -- a one-time reduction in estimated product returns through the retail channel; recognizing revenue related to Office 2000 upgrade coupons; and an accounting change that resulted in an increase in earned revenue -- Microsoft's fourth quarter growth rate was actually 26 percent year-over-year. "Twenty-six percent is a healthy growth rate, but not quite as torrid as the 39," Maffei said. "Please consider this when forecasting forward.

    Microsoft closed out a strong year. Fiscal 1999 sales were $19.75 billion, up 29 percent from the $15.26 billion reported in 1998.

    Earnings for fiscal 1999 came in at $7.79 billion, or $1.42 a share, up 69 percent from 84 cents a share in 1998.

    Windows platform sales were $2.24 billion in the fourth quarter, up from $1.7 billion a year ago. For the year, Microsoft had Windows sales of $8.5 billion, up from $6.2 billion in 1998. Applications revenue was $2.9 billion for the quarter, up from $1.98 billion a year ago. For the year, applications revenue was $8.8 billion, up from $7 billion.

    Consumer, commerce and other sales, which include Microsoft's Internet properties, were $593 million, up from $470 million. For the year, the "other" category reported sales of $2.4 billion, up from $1.9 billion.

    The software giant reported strong growth along all of its products including Windows, Office, Windows NT Server, SQL Server and Exchange Server. Office 2000 was made available to resellers June 10.

    Microsoft also showed strong sales across its geographic regions. In the South Pacific and Americas region, sales jumped to $2.3 billion in the fourth quarter from $1.59 billion a year ago. For the year, sales from that region jumped to $7.24 billion from $5.56 billion. In Europe, Middle East and Africa, sales in the fourth quarter jumped to $1.19 billion from $899 million a year ago. For the year, sales in that region jumped to $4.3 billion from $3.49 billion.

    In Asia, Microsoft reported fourth quarter sales of $570 million, up from $372 million a year ago. For the year, sales in Asia were up to $1.77 billion from $1.47 billion.

    Total sales to original equipment manufacturers were $1.6 billion in the fourth quarter, up from $1.28 billion a year ago. For the fiscal year, sales to OEMs were $6.39 billion, up from $4.7 billion.