Microsoft Corp, coping with its first annual sales drop, will make frugality a new way of life, Chief Financial Officer Chris Liddell said.
“This is not a crash diet where you stop eating for a couple of quarters —this is a new diet regime where you slim down and stay slim,” Liddell, 51, said in an interview at Microsoft’s headquarters in Redmond, Washington. “It’s actually about dialing up the importance of costs.”
Microsoft, which slashed $3 billion in operating expenses and cut about 5,000 jobs this year, expects software industry sales to expand 5 per cent to 10 per cent annually after the recession ends, Liddell said in the July 27 interview.
That compares with Microsoft’s 18 per cent sales growth in 2008. The company also faces a new challenge from Google Inc and Apple Inc, forcing it to keep spending on new product development.
Microsoft will save “a few hundred million” dollars this year by using computers in data centers more efficiently and distributing programs over the internet rather than using discs, Liddell said. Managers wanting to hire workers will need to balance them against cuts in other areas, and the company will trim spending on travel and company parties. Microsoft may relocate some customer support to countries with cheaper labor.
In the fiscal year just ended, the company made its first companywide job cuts and eliminated $900 million from capital costs. Microsoft also jettisoned products such as YouTube competitor Soapbox and the Flight Simulator video game, which weren’t succeeding or didn’t fit in to the company’s strategy.
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“I’m seeing them discontinue products, which is something they’ve never done before,” said Walter Price, managing director at RCM Capital Management in San Francisco. “It sends a signal that the company is serious.”
Price, who manages about $2.3 billion, had sold all his Microsoft shares last summer. He said he was impressed enough with the cost reductions in the past few months that Microsoft is now one of his fund’s top holdings.
Microsoft is working on the assumption that the global economy will expand at a rate of 1 per cent to 3 per cent annually once the recession ends, Liddell said. That’s a reflection of the “new normal,” he said, borrowing a phrase from Mohamed El- Erian, chief executive officer of Pacific Investment Management Co and chairman of Microsoft’s investment advisory committee.
Microsoft’s revenue plummeted 17 per cent last quarter, missing the average estimate of analysts in a Bloomberg survey by more than $1 billion. Sales fell across all of the company’s product lines. In the Windows division, which accounts for about a quarter of sales, revenue dropped 29 per cent. Sales in the business division, comprised mainly of the Office software, fell 13 per cent.
“When we get to a recovery let’s say it’s next year we’re going to have lower economic growth in the next five years than in the last five years,” Liddell said. He will talk about his outlook for the economy and Microsoft’s expense plans at the company’s annual meeting of financial analysts tomorrow.
Microsoft added 36 cents to $23.47 on Tuesday in Nasdaq Stock Market trading. The stock has gained 21 per cent this year, compared with a 43 per cent jump for Google and 87 per cent increase for Apple.
For years, Microsoft set the pace in the technology industry, a period when costs “took care of themselves,” said Bob Muglia, who has spent 21 years at the company and is now president of the server software unit.
“When you’re riding a rocket ship, you can afford to be sloppy,” Muglia said. When growth slowed this decade, Microsoft couldn’t cut expenses quickly enough, he said. In 2004, the company trimmed employee stock benefits and cut perks such as free towel service in locker rooms. Employees complained on blogs and the towels were put back two years later.
Microsoft CEO Steve Ballmer picked Liddell as finance chief in 2005. Liddell, a New Zealand native who once served as director of the country’s rugby union, was previously chief financial officer at International Paper Co, the largest US maker of cardboard shipping boxes. Microsoft wanted an outsider who wasn’t afraid to chop expenses, said Bill Koefoed, manager of investor relations.
After the stock market slump and the collapse of the financial system last year, Ballmer and Liddell spent their Christmas holiday determining what level of expenses needed to be cut. They decided to eliminate about 5 per cent of the workforce.
So far, the cost cuts haven’t kept up with the revenue declines. Operating margins will probably continue to narrow for the next two quarters because Microsoft can’t pare research and marketing spending to match revenue losses, Liddell said on a conference call with analysts last week.
Microsoft’s operating margin was 35 per cent for the year ended June 30, down from more than 50 per cent a decade ago. Margins will be 33.4 per cent in 2010, 36 per cent in 2011 and 37.7 per cent in 2012, estimates Brent Thill, an analyst at Citigroup Global Markets Inc in San Francisco.
“Their margins have not been where they need to be,” Thill said. “They should be a lot higher.”
Competition with Mountain View, California-based Google, owner of the most popular Internet search engine, has forced Microsoft to spend more on its computer data centers and strike deals with computer manufacturers to offer its Bing Internet search engine. Microsoft won’t scale back marketing plans for Windows 7, which goes on sale October 22, Liddell said.
Microsoft and Yahoo! Inc. are getting closer to forging a partnership to fight Google, a person familiar with the matter said yesterday. The deal would involve the companies sharing revenue for Web-search ads.
Besides cutting costs, Liddell is focusing on cash flow. Microsoft raised $3.75 billion in its first bond offering in May, adding to a cash pile that totaled $31.4 billion as of June 30. Microsoft suspended stock buybacks for the past two quarters because the company couldn’t “see the bottom” in the economy, Liddell told analysts on last week’s call. Now, he said, the company is “more confident.” He wouldn’t comment on timing for repurchases or on the company’s dividend in the interview.
Across the company, Microsoft managers canceled conferences and reserved business trips for visiting customers instead of employee meetings. Liddell also put more limits on business- class flights. Microsoft saved as much as $200 million on travel in each of the past two quarters, he said.
Liddell wants employees to fight much harder for customers and ensure products are released on time with all the promised features. The job cuts in January marked a new sense of urgency, he said.
“It was a huge wake-up call for people that this was not a fire drill, this was something serious,” Liddell said.
Thrissur-based Dhanalakshmi Bank has cloaked a net profit of Rs 6.05 crore for the quarter-ended June 30, as against Rs 3.06 crore during the corresponding period last year. Profit before tax surged 210 per cent to Rs 9.63 crore compared with Rs 3.10 crore a year ago.
Total income of the bank increased from Rs 59.23 crore to Rs 83.12 crore, logging a growth of 40 per cent. Non-interest income went up 20.47 per cent to Rs 6.06 crore during the quarter.