Greg 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.