VideoGreg Maffei says he doesn't lose any sleep over Microsoft Corp.'s antitrust battle with the Justice Department, simply because the software giant's 39-year-old senior vice president and CFO plays no role in the case. Yet Maffei claims that he worries about the company's future nonetheless.
What dark fate, apart from what the government's lawyers might convince the courts to dish out, could possibly await the world's most valuable company? After all, Microsoft boasts 90 percent-plus gross margins on a 90 percent-plus share of a growing market for its core product--the operating systems of personal computers--along with no debt and a cash hoard of $22 billion. It's a company that, after its initial public offering in 1986, zoomed from less than $350 million in revenue to $8.7 billion in less than 10 years, without having to raise an additional penny in capital. In Maffei's previous position at the company, he recalls, this enviable state of financial affairs prompted people "to come up and tell me that being the treasurer of Microsoft was a joke."
But since taking over the CFO spot in July 1997, following former finance chief Mike Brown's retirement, Maffei's main task has been to make sure Microsoft doesn't fall victim to its own extraordinary success. To hear him tell it, that's a tougher job than is immediately apparent. And it's a job that will require all of his reputed prowess as a tough, shrewd dealmaker.
The basic problem is that Microsoft's revenue growth is slowing. From fiscal 1995 to fiscal 1996, for example, the revenues that the company reported on its income statement soared by 46 percent, but the two fiscal years since have seen annual revenue growth slow to 31 percent and 28 percent, respectively. And Maffei says he expects revenue growth to decline both this year and next, unless Windows 2000 (Microsoft's new operating system) and Office 2000 (its updated office productivity suite) are as successful as he hopes.
A substantial part of the slowdown may be due to Microsoft's deferred recognition of revenue--a practice that has exposed the company to charges that it manages earnings. And the Securities and Exchange Commission has launched an investigation into its accounting practices with that issue in mind. However it's resolved, future growth will be harder to come by than it once was, says Maffei, and analysts agree.
"The days of consistent, 30 percent plus, year-over-year growth are over," notes Mary Meeker, an analyst for Morgan Stanley Dean Witter. This, of course, seems only natural. The larger a company gets, the harder it is to sustain its historical growth rates. And in Microsoft's case, analysts contend that further growth in its software business is constrained by the already considerable size of its installed base. "Microsoft is in a tough position," says Thomas Hensel, formerly an equity analyst at Everen Securities Inc., in Chicago. "They've saturated a lot of the market."
Given Microsoft's market share and profitability, one might think a slowing top line would merely require Maffei to lower investors' expectations so that Microsoft can continue to meet or exceed them. After all, Microsoft's track record on that front is almost as impressive as in marketing software. Maffei "always talks down the quarter," says Aaron Scott, an analyst for Advest Inc. in Hartford.
Microsoft, however, is not exactly known for reducing other people's expectations, or for being satisfied with anything less than head- turning growth. Its ambitions remain outsize. It wants to outfit giant corporations and home offices alike with its software. It wants to have a commanding presence in computing platforms and Web portals. It wants to offer new development tools to programmers and new Internet services to consumers. And it's developing a new business model that will depend on steady streams of revenue from software sales.
But though the Justice Department has done an admirable job of painting the Redmond, Washington-based behemoth as a crass monopolist, Microsoft is by no means assured of extending its dominance to the Internet. Or to the explosion of new devices and "information appliances" that require operating software, from handheld computers to cell phones to cable-TV set-top boxes. Meanwhile, the core franchise, Windows, is under attack from an unexpected new competitor, Linux, while bitter rivals Oracle Corp. and Sun Microsystems Inc. regularly proclaim the irrelevance of the operating system.
Even Microsoft needs friends in this competitive free-for-all. Better, it wants partners--made through investments, acquisitions, joint ventures--and it wants them fast.
Ferociously Laid-Back
Already, Maffei has embarked on a flurry of dealmaking. The most notable recent deal at press time was last May's $5 billion investment in AT&T. In exchange, Microsoft won the right to supply a simplified version of Windows for as many as 10 million of the set- top boxes that AT&T plans to install, plus an equity stake of as much as 2.9 percent.
Maffei played a critical role in the deal, as he has in most of the more than 120 investments and acquisitions Microsoft has made since he joined the company in 1993 as director of business development and investments. Maffei came to Microsoft from the CFO job at Pay 'N Pak, a troubled home- improvement chain that had been taken over by Citicorp Venture Capital. Previously, he had been a vice president at the venture capital outfit.
Reader Comments» Post a comment