Microsoft discovers secret to impressing Wall Street

Microsoft has changed the way it breaks out its financials in a shake-up likely to accentuate the positive and shield loss-making activities from close scrutiny.

The company said Monday it is consolidating seven existing operating segments into five, to "further align the company around three new operating divisions" created under a corporate re-organization last September.

Far from providing greater clarity for outsiders, though, the changes are likely to make it harder to measure Microsoft's success in new and growing markets. For example, Microsoft's loss-making enterprise resource planning and customer relationship management activities will now be reported along with the company's more successful Office family of products.

Microsoft will continue to report revenue from its client/server, tools businesses, and MSN unit as three separate segments despite having combined all three under the Microsoft platform and services division last September. Prior to September, these were also counted separately.

Microsoft said the shift was "consistent with the way they are managed and reported within Microsoft."

Next, Microsoft is taking revenue from the successful Exchange Server and adding it to the Microsoft business division segment, announced Monday. That segment also includes revenue from Microsoft's ERP, CRM, and Office products.

Under last September's changes, though, the Microsoft business division consisted only of Office, ERP and CRM, and it excluded Exchange.

Also, the home and entertainment, and mobile and embedded will report under one segment - the entertainment and devices segment - which mirrors the creation of the entertainment and devices division created in September.

These latter changes will make it harder to know what's profitable. Microsoft's ERP and CRM, home and entertainment and, mobile and embedded groups were all loss-makers as of Microsoft's third quarter.

Monday's changes reflect the fact Microsoft is trying to introduce growth into new markets while not jeopardizing its status as a stable company on Wall St. Microsoft sent Wall St. into a tizzy last quarter when it said it would spend $2bn more than expected on R&D to scupper Google. Analysts are now caught betwixt evaluating Microsoft stock as a growth option or a piece of portfolio padding.

Microsoft's shares fell 20 per cent since reporting results last quarter, and Microsoft will now want to re-assure Wall St. it's on target with vision and earnings.

Microsoft already relies on client and server and tools - along with Office - for more than half of its business. Earlier this year, Microsoft said it expects its ERP and CRM business to hit profitability in 2007 and become its next $1bn business. By combining ERP and CRM with Office, though, it will be impossible to say for sure how they are performing.

With revenue from new business unproven, Wall St. will be looking for positive growth in Microsoft's bread and butter businesses of Windows and Office. Microsoft is due to report its fourth quarter and fiscal 2006 on Thursday.®