The world's largest computer-software maker now has the widest gross margin of any company in the Dow Jones Industrial Average. That means it squeezes more profit out of each sales dollar than the 29 other companies in the benchmark index.
Selling software is so profitable because the products have virtually no manufacturing costs. Microsoft's gross margin, or the percentage of sales left after subtracting production costs, was about 86 percent for the December quarter. As the company moves to boost its sales growth by entering new businesses such as consumer electronics and Internet services, it expects margins to narrow, chief financial officer John Connors said Thursday.
''The margins are going in the wrong direction,'' said Independence Investment Associates analyst Edward Dowd, whose firm owns Microsoft shares in its US$28.6 billion portfolio. ''That's something to be concerned about.''
Margins are wide on software because it can be inexpensively reproduced and distributed once the programming code is written. Companies with higher manufacturing costs, such as personal- computer makers, have narrower margins. Dell Computer Corp, for example, had gross margin of about 21 percent in its third quarter ended in October.
Coca-Cola Co, the world's largest soft-drink company, has the second-widest gross margin in the Dow average, at about 70 percent, according to Bloomberg data.
Boosting Profit
Microsoft now gets about two-thirds of its sales from PC software. Connors downplayed the significance of the forecast for narrower margins, saying the company must diversify its product lineup if it wants to boost overall profit.
''The important thing for us to look at is growing our absolute profit at a level that's going to be very significant,'' Connors said in a conference call after the company reported second-quarter results.
Microsoft plans to introduce its Xbox home video-game console system this year. The company has said it will spend about US$500 million marketing the product in an effort to catch up with Sony Corp's PlayStation, the top seller in a market that analysts say has annual sales of about US$20 billion.
Analysts say game-console makers typically sell the hardware systems at a loss, instead profiting from game-software sales and license fees from other companies that make games for the machines.
The company plans to spend US$1 billion promoting its MSN network of Web sites and is offering US$400 rebates to new Internet access customers. Microsoft is building up its Internet assets so the company can leverage them to sell new online services it's planning for consumers and businesses.
With all that extra spending in the works, Connors is looking for areas where he can cut costs. He said he'll be reviewing budgets for Microsoft business units and looking to identify any projects that could be combined or eliminated altogether.
''We'll have to manage our operating expenses more judiciously,'' Connors said.
The shares of Redmond, Washington-based Microsoft rose US$5.50 to US$61 yesterday. They're up 41 percent this year, making Microsoft the best performer in the Dow Jones Industrial Average.
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