Cost Cutting Gives Boost To Microsoft’s Vast Fortune Latest Annual Report Shows Record Sales, Profits And Determined Savings Effort

There are two ways to make the kind of profits Microsoft makes year in and year out: Sell well and spend smartly.

Judging by the company’s latest fiscal-year financial report, its executives do both.

It’s no secret that Microsoft sells a lot of computer programs. But the richest software company in the world also has cut costs - looking more like a company pressed for cash than one with a $9 billion treasury.

Microsoft on Thursday reported record sales and profit for fiscal 1997, which ended June 30.

The results didn’t have the razzle-dazzle of Microsoft’s past two quarterly reports because they didn’t wildly exceed Wall Street analysts’ estimates.

Sales totaled $11.36 billion, up 31 percent from fiscal 1996.

Profit, at $3.45 billion, rose even more: 57 percent. For every share of stock, profit totaled $2.63.

Executives credited strong sales of Windows and Office software, new business in foreign markets and the popularity of new computers loaded with Microsoft programs.

They also cited recent cost-cutting moves.

By one measure, the company cut its costs nearly by half in the past four years. The amount Microsoft spends to achieve every dollar in sales has dropped from about 17 cents in 1993 to 9.5 cents this year. That number - called cost of goods, or COGS - doesn’t include all the company’s expenses. It’s just one category of costs, such as manufacturing and distribution; but it’s a key measure of a company’s efficiency.

“They continue getting closer to having … no costs on their products,” analyst Rob Owens of Pacific Crest Securities said with a laugh.

His comment reflected awe among some stock analysts. During a conference call with Microsoft’s financial executives Thursday, one analyst asked what could have brought costs so low.

Several factors - some forced, some fortuitous - have combined to make Microsoft a lean operation: Floppy disks are out: Software programs that used to require five or 10 floppy disks can now fit on one highercapacity CD-ROM disk, sharply reducing manufacturing costs. The more software a company sells, the more it saves. Thus, Microsoft has likely benefited more than its peers.

One size fits all: The software industry has figured out it doesn’t have to ship truckloads of software boxes to corporate customers. It’s cheaper to send a company a single box and sell a license to install the software on multiple machines. This requires detailed accounting to prevent cheating by the companies, but Microsoft is learning the trade is worth making.

Overhead is (literally) out: In its most controversial cost-cutting move, Microsoft is hiring outside companies to run many basic operational functions. This outsourcing means the company has cut people from its own payroll, negotiating contracts with outside service companies that charge less than it cost to run the staffs internally.

Bob Herbold, Microsoft’s chief operating officer, told reporters Wednesday that his staff had cut the operations staff from 3,685 to 3,003 in the past two years. One example: The company’s 63 secretaries were told they were losing their Microsoft jobs and would have to reapply to an outside vendor.

And last summer, Microsoft sold its Bothell disk-packaging plant to an outside company, and shifted 408 people off its payroll.

An outside company now manages Microsoft’s buildings and real-estate needs, saving $2 million to $4 million a year, Herbold said.

The cost-cutting extends overseas. A Puerto Rico plant with 47 employees likely will close soon, Herbold said. In Ireland over the past nine months, manufacturing and office staffs in three buildings were merged into two; the third building now houses several groups that had been scattered in rented buildings.

“We got out of a bunch of leases, saved a bunch of money and consolidated operations,” Herbold said.

Microsoft’s money-watching comes as the company anticipates its sales growth will slow. Instead of the 40 percent to 50 percent sales growth seen in some years, executives project rates closer to 20 percent.

The fourth fiscal quarter was strong - sales jumped 41 percent and profits 89 percent - but results are expected to begin slowing in the current quarter.