Microsoft Notebook: Translating Ballmer on profit potential

Deciphering the complex mixture of technical and financial lingo used by Microsoft Corp. executives isn't easy under normal circumstances, but even by those standards, a recent statement by Chief Executive Steve Ballmer required an extraordinary effort to decode.

In fact, most of those who heard it might have been tempted to let it pass -- if what Ballmer was trying to convey wasn't such an important part of Microsoft's expectations for the future.


		Bloomberg
	When Microsoft's Ballmer speaks, economists break out calculators.

The statement came during Ballmer's speech at the company's annual meeting with financial analysts on the Microsoft campus in Redmond two weeks ago. Explaining the prospects for increasing the company's operating profit, he referred to the financial results of three other companies.

"Over the next four years, we might be able to grow a whole Nokia, a whole Siemens, potentially even a whole Intel," he said, later reiterating, "I'd be awfully darned pleased in the next few years to start up a whole new Nokia, Siemens or Intel."

It was, to say the least, an unusual way of delivering a financial forecast. Ballmer conceded as much, acknowledging that the people in the audience would need to do some research to figure out what he was saying.

That wasn't an easy task, as it turned out.

Confusing matters initially was the fact that a company's size -- as in, "a whole Nokia" -- is typically expressed in terms of revenue, not operating profit. But looking closely at the context, including additional references by Ballmer to the profit of the three companies, it was clear that he was referring to the possibility of boosting Microsoft's operating profit by the equivalent of the operating profit of any one of those companies over the next four years.

Then there was the fact that both Nokia, based in Finland, and Siemens, based in Germany, report their results in euros, requiring a conversion to U.S. dollars to make an accurate comparison with Microsoft.

Not to mention the wide variety of ways that companies can express operating profit. Ballmer, for example, told the financial analysts that he was working with a pretax operating profit figure of $13.8 billion for Microsoft's most recent fiscal year -- which excludes special expenses such as legal settlements and the cost of a stock-option transfer program for employees. Microsoft's reported operating profit for the year was actually around $9 billion, including those types of expenses.

Coming up with comparable figures for the other three companies required finding measures of operating profit that excluded the same types of expenses Ballmer removed from his characterization of Microsoft's operating profit.

In other words, Ballmer's forecast was the type that only a mathematician, or perhaps an economist, could appreciate.

But taking all those things into account, a diligent crunching of numbers suggests Ballmer was saying that Microsoft could envision its operating profit growing over the next four years by somewhere between $3.5 billion (Siemens' fiscal 2003 operating profit, converted into U.S. dollars and excluding similar expenses) and $7.5 billion (Intel's fiscal 2003 operating profit).

That's significant growth -- about 6 percent to 12 percent per year -- demonstrating that Microsoft believes it still has the ability to increase its operating profit substantially. That was the point Ballmer was trying to make, before sending analysts and reporters on an impromptu fact-finding mission. Whether or not the company can maintain its growth as it matures has become a central question in the minds of many investors.

So why didn't he just come out and say the numbers? One financial analyst said Ballmer seemed to be trying to give Wall Street a general expectation for the future without being so specific that it could be taken as an official Microsoft statement of financial guidance, against which the company's future performance could then be judged.

Ballmer was "kind of saying it without saying it," explained Alan Davis, an analyst at McAdams Wright Ragen in Seattle who calculated the numbers and came up with the $3.5 billion-to-$7.5 billion growth range.

But Ballmer's references to other companies' financial results didn't end there.

"I was tempted, I'll admit, I was tempted to write an IBM on here," he said at one point during his speech, referring to the slide that listed Nokia, Siemens and Intel as comparisons in stating Microsoft's operating-profit growth potential.

"But, I'll tell you, I think it's out of reach in four years, unless their profits go down, in which case maybe we could do an IBM."

We'll save you the effort of looking it up: IBM posted pretax operating profit of $10.8 billion last year.

Microsoft Notebook is a Monday feature by P-I reporter Todd Bishop. He can be reached at 206-448-8221 or toddbishop@seattlepi.com

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