Redmond (WA) - Analysts dissecting the numbers from today's fiscal third quarter earnings report from Microsoft noticed a trend within the trend: The cost of revenue - what Microsoft paid in order to earn what it did - rose a staggering 49% over the same quarter in 2005. And while the company's guidance for the fourth quarter promised continued double-digit earnings growth, some analysts were noting a widening gap between what Microsoft expects to reap and what it expects to earn.
One Merrill Lynch analyst in particular - who apparently works for a company that knows how to do the math - worked out the fourth quarter guidance figures, and determined that Microsoft must be planning to spend up to $2.4 billion more than the firm had accounted for. His math may be off on occasion, the analyst conceded, but certainly not two-point-four-billion dollars off. If Merrill Lynch effectively accounted for every segment of the company, and Microsoft's estimates for expenditures were that much higher...what is it they're spending the money on?
Granted, the cost of doing business is rising for everyone, not just Microsoft. And the company is feeling some strain from having spent more than it expected to shore up its premiere of Xbox 360, whose launch last November sputtered due to lack of supply. There were aggressive investments being made in MSN as well, whose earnings declined 3% year-over-year for this quarter, and are expected to decline by another 5% next quarter. Those investments included the hiring of former Ask.com CEO Steve Berkowitz to lead marketing and other management duties for MSN. But unless Berkowitz is just a pseudonym for Katie Couric, analysts' questions implied today, it's doubtful he's being paid over $2 billion a year.
Today, Microsoft announced operating income for its fiscal third quarter of $3.89 billion (after legal expenses), on revenue of $10.9 billion. Revenue was up 13% year-over-year, but income was up only 5%. It's not a loss, by any means, and Microsoft is still a healthy company. But you can see the gap.
Revenue is actually down in all departments over the fiscal second quarter, when Microsoft reported a record $11.84 billion in revenue - but that drop was expected. Both commercial and retail licensing of Windows declined by a combined total of 6%, which contributed to the quarter-to-quarter revenue drop in the Client division. This is where the Vista delay makes its mark. But casting a far more serious shadow than that is the 3% year-over-year decline in revenue for the MSN division, which Microsoft had predicted would come in flat during its last quarter's guidance.