Friday, July 21, 2006

4th Q Financials

Looks like MSFT finally managed to avoid screwing up an earnings call. It's been quite a while since we could say that, and it's interesting that it comes on a quarter which saw a 24% decrease in YOY net income. Still, in reviewing the results, it was a decent quarter - not great, but decent. Ditto, guidance for next year. Of course, there were concerns. For example, Business Solutions - the subject of some of my previous rants - continued to underperform with only 16% license growth. How many years has MSFT been at this now and it's still not growing even at the market rate far less taking share from its main competitors? And let's not even talk about contribution to overall profitability, albeit that it did manage to notch a slight positive profit on the quarter and for the year. You just know someone got really creative with that +$38M profit on the quarter which magically put the division at +$24M for the year just as they get swallowed into the broader IW division for future reporting purposes - how convenient. And then there's MSN. What can I say about this perpetual laggard and decade-long investment failure? I think I'll leave it to Charlie Dibona, analyst for Sandford Bernstein, who posed this question during the conference call Q&A:

...when can we see you start to turn the corner and at least track towards the aggregate overall search market?

He went on to point out that MSFT's guidance for the division could have been accomplished just via the expected lessening impact of access business declines and the display business tracking the market. In other words, where the heck is the search advertising upside? That of course got a long-winded non-answer from MSFT CFO Chris Lidell. Apparently, '07 is yet another "transition" year for search - just like '06, '05...well, you get the picture.

Last, we have Home and Entertainment which was barely referred to at all in the earnings report or subsequent conference call. They did say that Xbox 360 shipments managed to meet the 5M units previously forecast (though shipments don't necessarily equal sell-through we should note). Oh, and they doubled the loss on almost double the revenue - nice to know that they managed to keep that linear. But beyond that, nada. Call me jaded, but when MSFT stops talking about its heretofore bragging poster child, that suggests there's trouble - which I take as sales being weaker than expected. Hopefully, there will be some more color at the upcoming analyst's meeting. At this point, it's totally unclear to me how Xbox will ever return the funds invested to date far less be a wise business investment. Of course, that doesn't stop Ballmer from calling it "one of the greatest creations of shareholders value ever". Perhaps it's just me, but what good is latent shareholder value creation that isn't reflected in the company's market cap, isn't driving earnings but is detracting from them? I guess you could argue that without Xbox, MSFT's top line growth would be even more anemic - which is true. But what good is profitless growth? Unfortunately, of late, Ballmer has been repeatedly quoted talking about "revenue, revenue, revenue". As an investor, I'm interested in healthy revenue growth. But I'm a lot more interested in driving earnings - something MSFT has lagged badly at for 5+ years.

Finally, for fun I looked at headcount stats since they were broken out in the earnings press release. Company-wide, headcount was up a whopping 16% despite % change revenue growth of just 11% and % change operating income of just 13%. Here are the relevant numbers by segment:

Client: 13% headcount growth on 9% and 8% respectively.
Server: 11% headcount growth on 15% and 31% respectively.
IW: 18% headcount growth on 5% and 3% respectively.
BSol: 10% headcount growth on 17% and 114% respectively.
MSN: 44% headcount growth on -2% and -119% respectively.
Mobile: 24% headcount growth on 44% and 103% respectively.
H&E: 19% headcount growth on 36% and -160% respectively.

Tell me, how many companies have the luxury of growing headcount faster than their growth rates and irrespective of whether they're even making a profit? And this is on top of the unprecented headcount increases since '00. Well, in the Alice-in-Wonderland world that is MSFT business management and accountability, apparently the answer is most. And note that the worst sink holes are also some of the biggest % headcount abusers. No wonder income continues to lag revenue growth badly, as it has for more than 5 years now, and the stock continues to flat-line along with it.

FYI - I'm still reviewing the buyback announcements and will post on them when I have a better understanding. For now, the Dutch auction seems about as useful as RPN on a calculator - but I know some swear by the latter so I'll dig into the former before commenting further.


  • I completely agree that its time to shape up and get aggressive. The head count in IT and core product development especially in the regions has been increasing by leaps and bounds and the unfortunate predicament is the new recruits with little or no experience at entry level and above being paid more than existing employees at the same level, causing more morale issues and productivity downfalls. The increase in headcount also beings to question certain HR policies and procedures. I don’t know how relevant or irrelevant this is to the above topic, but wanted to bring this up for more open discussions on the present situation.

    By Anonymous Anonymous, at 6:12 AM  

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