Microsoft profit may become less predictable, analysts say

Journal Record, The (Oklahoma City), Jul 2, 1999

REDMOND, Wash. (Bloomberg) -- Microsoft's earnings may become less predictable if the world's largest software maker is forced to change accounting practices because of a review by the U.S. Securities and Exchange Commission, analysts said.

Microsoft said that its accounting practices are being investigated following accusations that it reserved revenue for use in quarters when sales were slow. The company is cooperating with the probe and said it doesn't expect any material effect.

The company, which beat earnings expectations in the last six quarters, is a favorite among many investors and analysts because of its steady growth. The perception that Microsoft may lose its ability to "smooth" out earnings and that it's embroiled in yet another government investigation may hurt its stock price, analysts said.

"If investor impressions are that Microsoft's earnings volatility will increase, it could be a negative," said William Epifanio, an analyst at J.P. Morgan Securities, who rates the stock a "buy." "It doesn't affect the underlying performance of the company."

Microsoft is the subject of a government antitrust suit. The trial ended last week after 76 days of testimony.

Microsoft used "cookie-jar" accounting, the practice of reserving revenue for later quarters, according to a lawsuit by an ex-Microsoft internal auditor that was reported in the Seattle Weekly.

The ex-Microsoft auditor, Charles Pancerzewski, accused Microsoft of distorting its profits by fraudulently borrowing from reserves in lean times and hoarding them in good times.

SEC Chairman Arthur Levitt has been campaigning since last fall against accounting irregularities, specifically against the practice of companies manipulating their earnings to meet analysts estimates, or "earnings management."

Microsoft also said that it will recognize more revenue from new products sooner, which will add about a penny per share to analyst estimates for fiscal fourth-quarter earnings.