And the first shoe drops...

A previous post shared some concerns I was seeing for the upcoming earnings report and FY guidance. One of these, was the the issue of potential free/reduced-cost Vista upgrade coupons. These coupons has been rumored for months, but the story got renewed life this past week along with a new concern: an adverse financial impact on MSFT. Then, as if on cue, up popped Goldman Sachs analyst Rick Sherlund - always your first clue that bad news is imminent - to raise the alert while trying to mitigate the negative impact. He was joined by fellow top-ranked s/w analyst Heather Bellini of UBS. See story here:

• Vista promotions to cut Microsoft

Bellini's take:

UBS AG's Heather Bellini, Institutional Investor magazine's top-ranked software analyst, reduced her estimate for sales to $12.6 billion from $13.4 billion and sliced her profit estimate to 32 cents a share from 38 cents.

[While it's not 100% clear from the article, that's apparently for Q2 not Q1].

Sherlund's take:

Sherlund, the second-ranked analyst, estimates $500 million to $1 billion in revenue may need to be pushed into the next two quarters. He also said Microsoft may need to defer $200 million in sales of Office software if it offers coupons for upgrades to Office 2007, which is being released at the same time as Vista.

As above, the coupons had been rumored for months. So why did both analysts wait until the week before earnings to raise this concern? After all, had the coupons come earlier (as most expected) then both would have been caught flat-footed. Of course, despite this new bump in the road, both maintained their "buy" recommendation (Sherlund's being effectively useless anyway since he's been wrong for 4+ consecutive years - but that's another story).

Now today, we finally get confirmation of the coupons and that they will be valid for purchases starting Oct. 26th:

• Microsoft to start Vista coupon plan for PC buyers

We also get a hastily called webcast by MSFT to review the financial impact:

• Microsoft to Discuss Technology Guarantee Programs

At that, we find out that [drum roll] Office will be included and the actual expected impact will be $45M of revenue in Q1 and a whopping $1.5B in Q2 shifted to Q3 (far beyond either Bellini's or Sherlund's guesstimate) - with unstated but related impact on Q1-Q3 earnings and Q1-3 unearned revenue. The good news? Supposedly, full year results are not expected to be impacted. The bad news? Well, you already heard it - the program is going to adversely impact Q1 and especially Q2. Which of course is likely why we got this transparently choreographed song and dance in the first place, all timed to try and take some of the sting out of the expected fallout when earnings are released Thursday and [now] dramatically lower Q2 guidance given.

Don't get me wrong, the coupons are a good idea for both consumers and MSFT's PC eco-system partners. But given that Vista's latest ETA had been maintained by MSFT since long before the fiscal began, why weren't the coupons and their impact on quarterly flows already part of guidance? Did they not believe their own ship dates, or did they somehow conclude that coupons could be avoided w/o Xmas sales being dramatically impacted? [I could use another more plausible option here]. Now, once again, the upcoming earnings report/guidance will likely be mired in confusion. Which, color-me-jaded, but perhaps is the intent: Now you see the pea, now you don't; Pea not coming in as planned? Move all the shells around. Someone still manages to note the pea discrepancy? Don't worry, it'll be under the Q3 shell - trust me. Unfortunately, disappointed investors have had enough of MSFT's shell games and are likely to sell first and ask questions later. If this transpires, review my post about the proxy and factor your response accordingly.