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SOFTWARE

Analysis of Microsoft's Latest Financial Results

Microsoft Eclipses IBM!

As Microsoft's Chief Is Hit with a Pie, Not Just Lawsuits

Noel Godin, a Belgian prankster gave a whole new meaning to the term "pied piper" when he hit Bill Gates with a pie on Feb. 4, 1998, as the Microsoft chairman arrived for a meeting with Belgian business and government leaders in Brussels. Microsoft's "pied piper" - the company's most outspoken person - later said that the pie didn't taste very well.

Pied Piper

gatespie.jpg (6632 bytes)

Two days earlier, in a letter to Microsoft employees, Gates said more or less the same thing about being hit by the federal antitrust lawsuit. "The computer industry today does not need this type of government intervention," he said, while extolling the virtues of vigorous competition in the IT industry.

America's richest man, dropped in on the Belgians after having rubbed shoulders with some 2,000 business and government leaders at the annual World Economic Forum in Davos, Switzerland. Hillary Clinton, the German Chancellor, Helmut Kohl, and other speakers addressed the opening session attended by Presidents of Mexico, Argentina, Brazil, Chile and Prime Ministers of Russia, Thailand, Ukraine, among other dignitaries.

The First lady chided the U.S. business leaders for not giving stronger support to her husband's failed efforts to win congressional backing of the proposed "fast track" legislation.

Besides Gates, Larry Ellison of Oracle and Steve Case of America Online were among the duly admonished, though not pied, U.S. business executives.

Strong Business Results, Microsoft Eclipses IBM!

Meanwhile, despite its legal troubles and an 8% decline in Asian revenues, Microsoft reported exceptionally strong business results for the last quarter of 1997, the second quarter of its fiscal year 1998, which ends in June. Net earnings surged by 49% over the corresponding period the year before, on a revenue increase of 34%.

For the first six months of its FY98, Microsoft profits jumped by 32%, while revenues rose by 35% to $6.7 billion. This puts the company on track to exceed $14 billion in the current fiscal year. More importantly perhaps for Microsoft's marketing image, its annualized first half FY98 revenues mean that Microsoft has now eclipsed IBM for the first time in history. IBM's 1997 software revenues were $12.8 billion, while Microsoft's annualized 1H98 revenues were $13.3 billion.

So finally facts have caught up with perceptions. Microsoft is indeed now the world's largest software company! This also fulfills a prediction we made some two years ago when we said that Microsoft will surpass IBM in 1998 (see Annex Bulletin 96-27, 4/24/98). If anything, the Microsoft eclipse has occurred a little sooner than we had thought, thanks to IBM's slump last year, when its software revenue decline 2% (see Annex Bulletin 98-02, 1/20/98). Nor is the outlook much better for this year, as the Big Blue continues to face the erosion of its mainframe software base, which still accounts for a giant (70%+) share of its total revenue.

Another Eclipse: Strong Platforms' Growth

The shipments of the Windows 95 and Windows NT operating systems, the main components of what the company calls its Platforms Products Group, have been soaring in the two-and-a-half years since the Windows 95 announcement. During the FY97, the Platforms' revenue was up 45% as compared to "only" an 18% rise in Applications and Content revenues.

This has led to another eclipse. For the first time ever, the Platforms' revenue has exceeded that of Applications'. In the FY97, the former accounted for $6 billion, or 53% share of the company's' revenues.

Microsoft's "OEM revenues" (the license fees paid by the PC manufacturers which ship their systems with pre-installed Microsoft software) have more than doubled in the two years since the Windows 95 announcement. During the FY97, they increased by 39% to $3.5 billion, or almost one-third of all Microsoft revenues. And the momentum has carried on into the FY98. During the last quarter, the "OEM revenues expanded (by) 40%," according to Greg Maffei, Microsoft's CFO.

No Respect

Yet, despite such tremendous business results; despite becoming America's richest man; despite becoming a household word; Bill Gates may go down in history as "the computer industry's Rodney Dangerfield." Not only has he become the butt of more jokes than most celebrities, with a possible exception of Bill and Hillary Clinton, but this Microsoft "pied piper" has now been also ignominiously pied smack in the "capital of Europe" - the seat of the European Union. What an indignity!

Which goes to show us that you can't buy respect. To his credit, the Microsoft chairman seems to understand that. Responding to a question after his recent talk at Stanford University, Gates, whose personal fortune is estimated at over $30 billion, made a comment which is bound to startle many, especially his critics.

Gates said he did not intend to pass his fortune on, and that at a later period in his career he plans on giving away most of his wealth. "I am just a steward of this wealth, and some day I will return it to society," he said according to a Jan. 28 New York Times report.

Such an act of philanthropy may eventually earn Gates the respect he is now lacking. Unless, of course, he does a Ted Turner, and turns his money over to the United Nations bureaucrats. In which case a lack of respect may quickly turn to scorn. Let's hope that Gates will have more sense and indeed give it back to society at large.

Happy bargain hunting!

Bob Djurdjevic

Additional Charts

  • Microsoft 1H98 revenue sources
  • Microsoft FY97 revenue sources
  • Microsoft international revenues
  • Microsoft business trends 1990-1998
  • Microsoft gross margins 1990-1998
  • Microsoft FY97 employment
  • Microsoft's FY97 sales productivity

Tables

  • Microsoft Worldwide Operations '95-'97: Revenue, Operating Profit, Field Operations, Total Employees, 1997 Financial Ratios
  • Microsoft Worldwide Operations '95-'97: P&L

Can you afford not to know things like the info. outlined above?








Volume XIV, No. 98-06
February 5, 1998

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

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