Did Microsoft Alter Windows Sales Figures?

Saxophonist writes "InformationWeek claims to have analyzed Microsoft's most recent Form 10-Q and observed that a reported increase in earnings for the Windows unit may be due to accounting trickery rather than actual sales growth. Microsoft apparently increased its reported revenues for its Windows, Server & Tools, and Office units at least partly through shifting revenues from other units. While there may be nothing 'to suggest the company's revisions violate any accounting rules,' the actual growth in Windows sales was likely nowhere near the high double-digit percentage growth claimed. InformationWeek speculates that revenues from Xbox and Surface may have been among the revenues shifted to the other divisions."

Comments

Yes

[Anonymous Coward]

They're a Fortune 100 company. They did.

Re:Yes

[hsmith]

Well look at it this way - they aren't fudging their balance sheets as bad as the US Government

Re:Yes

[Low Ranked Craig]

there lying what?

Re:Yes

[HermMunster]

Microsoft wants to make their company seem like it is more profitable so that their share values go up, shareholder confidence returns, and they give the people the impression that they are still on top making the best product. Apple's been killing them in the area of revenue yet Microsoft had been ahead in profit. Now Apple has that crown too--even with obvious overhead of paying for the bill of materials (BOM). Microsoft seems to have problems coming up with new ideas and technology. Everyone knows they are basically stuck with Windows and Office, and that that'll last only so long.

So, people distrust them and they have an issue with demonstrating they are still on top (which they are, just not the very top any longer). So, they cook the books to make it seem like they are doing better than they are with their new product.

Does anyone here have any knowledge of products that Microsoft is developing that will satisfy the masses addiction to technology? Don't say WinMo7 because that's pretty much going to flop in my opinion. Anything else? I don't think they can sustain following up on other's products. They need something new and unique to them. A new radical version of Windows isn't it either. They are basically loosing on the embedded front, they are loosing on the smart phone market, they are loosing the tablet wars (which I don't think they can bring themselves out of).

Re:Yes

[DaveGod]

Actually, they didn't. Even a basic check, like reading the press release, tells you what they did.

Infoweek made at best a gaffe. They took the figures for the 3 months ended 30 Sept 2009 originally stated and compared them to the 30 Sept 2010 figures recently released, even though right beside those 2010 figures are the 30 Sept 2009 figures updated to reflect the new accounting policy.

Calculating using the figures sitting side-by-side, this change in policy does not distort growth. This what accounting rules require (at least under IFRS, I can't imagine US GAAP does differently), and why. MS also used the revised policy in the %'s given in the press release, so they are both under the same policies. Nowhere in the PR does MS refer to the faulty figures Infoweek is complaining about. Infoweek's article is all about them realising that they were using the wrong figures but not realising that it was due to their own mistake.

For Infoweek to compare against the wrong figures they had to ignore the comparatives given right there in a spreadsheet file given by MS and instead go find an old file, and ignore the prominent disclosure given to the change in the press release that provides the link to the filing:

In addition, we have recast certain prior period amounts within our Form 10-Q that conforms to the way we internally managed and monitored segment performance during the current fiscal year.

As for the deferral of income from Vista sales with W7 upgrade packs, that follows accounting rules too (well, assuming they calculated it properly). Regardless, the entire second paragraph is dedicated to explaining the impact of the accounting rule and even removing it to show the underlying performance:

Prior year results reflect the deferral of $1.47 billion of revenue, an impact of $0.12 of diluted earnings per share, relating to the Windows 7 Upgrade Option program and sales of Windows 7 to OEMs and retailers before general availability in October 2009. Without the deferral in the prior year, first-quarter growth rates for revenue and operating income were 13% and 20%, and growth in net income and earnings per share were 16% and 19%, respectively.

Oh and there's reconciliations and everything in the accompanying slides. Infoweek's "exclusive" refers to their mistake regarding policy changes that were very prominently disclosed.

I know MS isn't exactly celebrated around here, but posting this kind of thing detracts considerably from the credibility of the more valid criticisms.

SOP?

[Nidi62]

I thought pretty much every publicly traded company did stuff like this?

Re:SOP?

[Chrisq]

I thought pretty much every publicly traded company did stuff like this?

Not just publically traded. I worked by a privatley owned company where basically each departments end of year bonus was decided by a bunfight to decide which department was responsible for how much revenue and at what cost. The only fixed thing was the company total, they shuffled things between departments and divisions at will.

Re:SOP?

[Black.Shuck]

decided by a bunfight

If only *all* things in life could be decided by a bunfight.

*sigh*

Re:SOP?

[Eponymous Coward]

Your example is actually correct. Microsoft as a monopoly is restricted in what they are allowed to do much more so than a smaller company like Apple. It might not always make sense, but abuse of monopoly power is a very serious offence.

These days it might sound funny to talk about Microsoft as a 900-pound gorilla, but at one time they definitely were.

Re:SOP?

[mcgrew]

Failure, my ass. Shooting yourself in the foot ON PURPOSE is not failure. They hit their taget, didn't they? That's not failure.

Re:SOP?

[dbIII]

It's rumoured that Rupert Murdoch's Newscorp was like that for years with a flow of money from one company to another to give the illusion that the entire thing was above water and that he could afford to buy things like Fox.

Re:SOP?

[Locke2005]

In bunfights, there are no losers, only weiners.

Re:SOP?

[Higaran]

http://www.fiercemobilecontent.com/story/itunes-now-70-digital-music-sales-amazon-growing/2010-05-27 I know this is kind of an old link but 70% of the market qualifies as monolopy. Plus the fact that they are about 30% of all music sold in the us every month. They are even under a DOJ invistigation. http://topnews.us/content/221070-apple-under-doj-investigation also kind of an old link. Then they are trying to dictate other stuff, like the whole thing with flash. IMHO if the DOJ is investigationg you for anti-trust laws, then your pretty much a monolopy or on the verge of becomeing one.

Re:SOP?

[UnknowingFool]

http://www.fiercemobilecontent.com/story/itunes-now-70-digital-music-sales-amazon-growing/2010-05-27 I know this is kind of an old link but 70% of the market qualifies as monolopy. Plus the fact that they are about 30% of all music sold in the us every month.

Monopoly does not mean highest marketshare. Marketshare is only one test of monopoly power. One of the other tests of monopoly power is whether you can get suitable alternatives. Another test is barrier to entry.

In the case of music, iTunes is not the only source of music. You can buy music by buying CDs through brick and mortar as well as online sales. Even if you limit the market to online music, you can get music through iTunes, Amazon, Zune Marketplace, etc. The only limitation is that you have to get music in a compatible format with your player. Since AAC or MP3 can be played by many players (and isn't controlled by Apple) there are alternatives.

Secondly, if you didn't have alternatives to iTunes could any company launch an alternative without significant barrier to entry. Both Amazon and MS did after iTunes was launched. The real barriers to entry are approval of the RIAA companies which is not within Apple's control and money to build your web store.

They are even under a DOJ invistigation. http://topnews.us/content/221070-apple-under-doj-investigation also kind of an old link.

From what I know about the situation, Apple did not like it when they heard that Amazon was going to get exclusive content from the record companies.

Stone cited "people briefed on the inquires," who said investigators have been particularly interested in allegations that Apple used its market power to seek to prevent the labels from participating in exclusive music distribution deals with rival Amazon.

My reading of that is Apple was trying to prevent exclusivity. They did not prevent Amazon from getting content but rather exclusivity of the content. Slight difference.

Then they are trying to dictate other stuff, like the whole thing with flash. IMHO if the DOJ is investigationg you for anti-trust laws, then your pretty much a monolopy or on the verge of becomeing one.

There's a difference between what Apple has done with Flash and what MS did (which is the counterpoint). Apple has dictated that their own players will not use Flash. Apple has not dictated what Android or MS does with Flash. MS told Intel not develop a Java VM or MS would "favor" AMD in their next version of Windows.

Also investigation != conviction. Not every investigation leads to charges or conviction. Sometimes the investigation is settled or even dropped.

the truth!

[cindyann]

Since I'm a shareholder -- by virtue of mutual fund shares in my 401k and IRA accounts -- I want to know the truth.

Re:the truth!

[Ben4jammin]

Yea well good luck with that

Re:the truth!

[AdmiralXyz]

But see, that's the beauty of corporate accounting. They never actually lie, it's all a matter of classifying revenue sources and sinks in brain-twisting ways that are technically accurate, even though from a bird's-eye view they give a completely mistaken impression of what's going on.

And this isn't consigned to Microsoft, like an above commenter said, every Fortune 500 company has done it to varying extents. It's difficult to make illegal, too, because there's no one technique used (seems to be as much an art as it is a science, finding loopholes that aren't closed); so it's impossible to write a law that's general enough to stop the practice yet still enforceable.

Re:the truth!

[maxume]

The Information Week story is quoting from an SEC filing that Microsoft made. A filing Microsoft knows is public. So Information Week didn't exactly bust anything open here, and you just have to decide if you care about Microsoft's results on a segment by segment basis, or if you are happy owning the company in general.

Re:the truth!

[UnknowingFool]

Interesting quote:

The spokesperson said some of the changes were the result of embedded systems products being moved from EDD to Server & Tools and Mac Office's move from EDD to the Business unit after Bach left.

For many years, Mac Office revenue was counted towards Entertainment and Device Division. I've always thought that was rather strange that it wasn't part of the Microsoft Business Division where it belonged. MS might have organized revenue based on the executive in charge which is normal. But also it could be that MS was trying to soften the massive losses of the Xbox first seven years.

Re:the truth!

[gnasher719]

There isn't anything particularly brain twisting here, and I'm not sure what mistaken impression the revisions discussed in the article are supposed to create (before the revisions, the quarterly net income for the entire company is $5.4 billion on revenues of $16.2 billion, after the revisions it is exactly the same, most businesses would kill to be that profitable, and they would kill their mothers to have the 'billion' in those numbers).

Here's what you are missing: Everyone expects Microsoft to be highly profitable in their core business, and investors are used to the sad fact that Microsoft wastes a billion here and there on things like buying revenue for Ping. So if the losses in the online division grow, or XBox doesn't as well as expected, nobody cares much because the main business is safe as ever. All those losses in online can be stopped any second by just leaving that business area, if Microsoft wants, so it's nothing to worry about.

But if Microsoft makes less money in Windows, Office, or Server, or if it is found out that it props up its main business by moving money from other areas, that is a very, very bad sign and investors would be quite unhappy.

Re:the truth!

[rmcd]

Obvious retort: You can't handle the truth.

This brilliant parody has been floating around for quite a while, author unknown (I found it at http://www.trinity.edu/rjensen/fraudenron.htm )

        A take-off from the movies "A Few Good Men" (Some phrases are in the original script and some are altered.)

        Tom Cruise: "Did you order the shredding?"

        Jack Nicholson: "You want answers?"

        Tom Cruise: "I think I'm entitled."

        Jack Nicholson: "You want answers!!"

        Tom Cruise: "I want the truth!"

        Jack Nicholson: "You can't handle the truth!"

        Jack Nicholson: "Son, we live in a world that has financial statements. And those financial statements have to be audited by men with calculators. Who's gonna do it? You? You, Dept. of Justice? I have a greater responsibility than you can possibly fathom. You weep for Enron and you curse Andersen. You have that luxury. You have the luxury of not knowing what I know: that Enron's death, while tragic, probably saved investors. And my existence, while grotesque and incomprehensible to you, saves investors. You don't want the truth. Because deep down, in places you don't talk about at parties, you want me on that audit. You need me on that audit! We use words like materiality, risk-based, special purpose entity...we use these words as the backbone to a life spent auditing something. You use 'em as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very assurance I provide, then questions the manner in which I provide it. I'd prefer you just said thank you and went on your way. Otherwise, I suggest you pick up a pencil and start ticking. Either way, I don't give a damn what you think you're entitled to!!"

        Tom Cruise: "Did you order the shredding???"

        Jack Nicholson: "You're damn right I did!"

Re:the truth!

[UnknowingFool]

It is a sad state of investing that investors like companies that are growing or expanding. In decades past, it was enough that a company was profitable and stable. But back then most companies offered dividends with shares. More companies are going away from dividends and thus there is not a lot of interest by investors to be concerned with stability. They want growth.

If MS cut all the unprofitable products, then that would show then as not growing or expanding in anything other than Office and Windows. Even though MS offers dividends, their stock price has been fairly stagnant in the past decade. That would drive more investors away.

Re:the truth!

[FriendlyPrimate]

Here's what you are missing: Everyone expects Microsoft to be highly profitable in their core business, and investors are used to the sad fact that Microsoft wastes a billion here and there on things like buying revenue for Ping. So if the losses in the online division grow, or XBox doesn't as well as expected, nobody cares much because the main business is safe as ever. All those losses in online can be stopped any second by just leaving that business area, if Microsoft wants, so it's nothing to worry about. But if Microsoft makes less money in Windows, Office, or Server, or if it is found out that it props up its main business by moving money from other areas, that is a very, very bad sign and investors would be quite unhappy.

Hrm....maybe all those unprofitable divisions aren't so unprofitable after all?

Company released sales figures

[falldeaf]

I always mentally put these parts of the slashdot poll disclaimer in front of sales figures released by *any* company: "This whole thing is wildly innacurate ... If you're using these numbers to do anything important, you're insane."

Re:Company released sales figures

[ByOhTek]

maybe, but how many companies have "Cowboy Neil" in their sales figures?

Re:Company released sales figures

[dkleinsc]

Except of course that people are using these numbers to do something important.

And this isn't just an idle problem: There have been colleges, pension funds, charitable foundations, and retirees crippled financially for decades because they looked at companies like Enron which were generating good consistent returns and decided that it was a good investment. This stuff does real damage to people, and the SEC simply doesn't have the resources to stop it.

Re:Company released sales figures

[FriendlyPrimate]

And when the company does finally collapse, the people who were responsible for the creative accounting are long gone doing the same thing to another company.

I tend to believe in the power of capitalism. But what I've seen lately is not just capitalism...it's pure greed. It's an economy run by narcissists who care of nothing else but their own personal pocketbooks. The company, the workers, the investors....it means nothing to them other than a means to an end. And we worship these people. And on the flip side, the people who actually produce the wealth in this country get castigated for being greedy because they want above-poverty-level wages.

Re:Company released sales figures

[Locke2005]

how many companies have "Cowboy Neal" in their sales figures? Several, but they are all fast food franchises.

Re:Company released sales figures

[cbhacking]

Enron is a completely different case. They were actually lying about their financial status. MS did in fact earn as much money as their reports say, and did have as many expenses. They just decided that, for reporting purposes, it looks better if they attribute a greater share of that profit to sales of Windows and Office rather than sales of Xboxes. Nobody is going to suddenly discover that MS is actually bankrupt and has been lying in their statements; at worst they might learn, in surprise, that enterntainment devices have become bigger business that previously expected.

Re:Shuffling deck chairs on the Titanic?

[gman003]

I'm hoping it's shuffling deck chairs on the Hindenberg - it will be more fun to watch.

Accoutant Interview:

[AnonymousClown]

A manager was interviewing accountants for a job. The first accountant came in and the boss asked, "What's 2+2?"

The first guy says, "4".

The mgr thanked him for his time and dismissed him because he was too honest. Then he called the second guy in. "What's 2+2?", he asked again.

"5" was the response.

He was thanked and rejected because he was incompetent, The manager then asked the third accountant in. "What's 2+2?"

The third accountant answered, "What do you want it to be?"

He was hired on the spot.

Re:Shuffling deck chairs on the Titanic?

[Toe, The]

I think it's turning out more like shuffling governors in the Ottoman or British Empires. A slow, gradual, slightly-pathetic decline as one setback overshadows another.

Re:Desperate CEO?

[Locutus]

they have probably been doing this for years so I don't think it shows anything about the CEO's mental condition. If I recall correctly, one time they cut their R&D by 50%(something around $3billion) and amazingly almost every division turned in either a small profit or far less than the typical $250 million in losses they usually show. The following year they were all back to their usual hundreds of millions in losses.

I just don't think this is new for them, just easier to notice.

LoB

Is any huge corporation completely honest?

[digitaldc]

Actual sales versus paper sales...Microsoft is a huge profitable corporation so WHO CARES?

Is CmdrTaco a Pedophile?

[TheRaven64]

Am I the only person who hates these allegation-disguised-as-a-question headlines? Please can we stop posting them? If you're going to make an allegation, make an allegation, don't try to pretend that you're asking the audience for their opinions. If you can't back them up, don't make the allegations, and if you can then don't hide behind weasel words in the headline.

Re:Is CmdrTaco a Pedophile?

[SiChemist]

The story headline was "Exclusive: Microsoft Altered Windows Sales Numbers". I take the slashdot headline as questioning whether the story is completely accurate. Your beef appears to be with the story headline.

Speculates

[jamesl]

InformationWeek speculates that ...

Another word for "speculate" is "guess." A news organization should do neither.

And then Monkey Boy sells his stock

[bdsesq]

So the company lies/misstates/whatever to make the core businesses look better and prop up the stock.
And the, by some coincidence, monkey boy sells a billion or two of stock.

Move along. Nothing to see here.........

Common Practice

[clyde_cadiddlehopper]

They're a Fortune 100 company. They did.

Yes. Most companies have a growing, but money-losing "star", a flat but highly profitable "cash cow" and a few others that are in between. It is common practice to disguise the actual performance of those business units by creatively defining segments for external SEC reporting.

Re:The Surface has revenue to shuffle?

[UnknowingFool]

How does WP7 look good? Besides the huge amount that Microsoft has dumped in marketing it really is a half baked OS at launch.

I mean it wasn't a buggy, half complete mess of a product that some of their products have been. For example the Kin. It was a "social" phone without many social features. It crashed a lot. The advertised features didn't work right. While the WP7 lacks the maturity of the iPhone, Android, even WebOS, it is at least usable. Many of their version 1.0 products can't say the same. It will take time for WP7 to catch up, but it's a decent start.

Re:Shuffling deck chairs on the Titanic?

[bennomatic]

Something about this imagery makes me LOL. Of course, I think of an ottoman going with my couch, not with a deck chair.