More Top-Line Pain Ahead for Microsoft

The elimination of those options means Microsoft's stock-based compensation expense will drop to about $750 million a quarter from previous estimates of $1 billion. While significant, most analysts exclude stock-based compensation charges from their estimates.

In addition to those lower stock compensation costs, Microsoft also will focus on "cost efficacy," Connors said. Focusing on containing the growth of expenses should enable the company to post good profit in fiscal-year 2005, but top-line growth will be difficult because of tough comparisons to 2004, he said. "The comps will just be a challenge going into 2005," he said.

Indeed, because of the decline in deferred revenue, some analysts have lowered their growth-rate estimates for fiscal-year 2005. "Given the loss in unearned [revenue], reported revenue growth is expected to be a more anemic 6%" in fiscal 2005, RBC Capital Markets analyst Sarah Mattson wrote in a note last week.

In the short run, the drop in unearned revenue doesn't matter because it will be offset by improvements in PC and server demand and growing IT budgets, Mattson said. "In the longer run, however, Microsoft's visibility deteriorates, its business is more dependent on upgrade cycles and the unpredictability of its business potentially grows," she said. Mattson has a sector perform rating on Microsoft and her firm hasn't done banking with the company.

With the more than $1 billion in deferred revenue cut from his model, Sherlund said in a recent note he is forecasting that Microsoft will post 8% revenue growth and 6% earnings growth in fiscal-year 2005.

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