MSFTextrememakeover

Wednesday, April 25, 2007

Show us what you've got

Here we go again - quarterly earnings. Time for current leadership to take a break from providing conflicting messages, empty marketing spin, jealously trash-talking better performing competitors, professing undying confidence in the future while leading the industry in insider selling, etc., and just show us the numbers.

So far, GOOG and AAPL have BLOWN AWAY estimates this quarter. For example, here are AAPL's exceptional results from last night (the stock is currently up >$3+ today, following a $2 gain before the news yesterday):

Apple reported on Wednesday net income for its fiscal second quarter jumped to $770 million, or 87 cents per share, from $410 million, or 47 cents per share. Revenue rose 21 percent to $5.26 billion. The results blew away Apple's own forecast, which tends to be cautious, of 54 cents to 56 cents. Analysts had expected Apple to earn 63 cents per share, on average, on revenue of $5.17 billion, according to Reuters Estimates.

Even perpetual spoiler AMZN managed to beat the street handily. Will MSFT? TBD. PC sales have been strong, and Office sales have reportedly been so too - which should help. But recall that major deferred revenue from last Q will be recognized this Q. While that will skew the numbers higher, it will likely also cause confusion and delay as analysts try to adjust for it and figure out what happened on a normalized basis. Of course, actual earnings are unlikely to materially impact the stock - unless it's a real blowout either way. Instead, as usual, the fate of the latter will rest primarily on what MSFT has to say about guidance for the year - especially given the uncertainty caused by Ballmer's now infamous "some Vista estimates are overly aggressive" doublespeak. Heading into the report, expectations appear to be pretty low. Remember the good 'ol days when the stock ramped heavily into earnings? When the main concern wasn't would they beat, but by how much? Well, those days are long gone. Now, if there's a predominant sentiment it's usually fear. Fear of a miss. Fear of reduced guidance. Fear of some comment that will extinguish whatever spark of investor interest has begun to materialize. There's a huge message there for MSFT's Board of Directors. Are they listening?

Given the low expectations, a meet or slight beat, combined with no change to [previous] guidance, might be sufficient for a relief rally. But coming on the heels of AAPL's upside blowout, that kind of lackluster result could once again raise concerns that MSFT is struggling while some others are hitting on all cylinders. In other words, it might highlight the truth. Which, if you're a fellow long, would be a bad thing. So, hope that they put up something better than that (possible on earnings, doubtful on guidance), or that the market has long since figured out what an under performing mess MSFT is, and already knows that AAPL and others are operating in a different league entirely.

Pre Earnings:

Some preview articles, if you're interested:

I'll provide more commentary post conference call.

Post Results:

A quick review says better than expected. EPS appears to be $.50 vs consensus $.46. Haven't had time to see what's in there, but on the surface it's a decent beat. A whopping $6.9B of buybacks on the Q obviously helped. The important item - guidance for next year - seems to be in tact and even increased slightly (now calling for EPS $1.68-$1.72 on Revenue of $56.5-57.5B, versus consensus EPS of $1.70 on Revenue of $56B). However, guidance for Q4 is down (EPS of $.37-$.39 on revenue of $13.1-$13.4B, versus consensus EPS of $.41 on revenue of $13.4B). Taking a brief look at segment results, Client was strong as expected given the deferred impact from last Q (revenue up 67.3%, profit up 70%). Ditto the Business Division (revenue up 33.8%, profit up 42.2%). Server and Tools notches a slower but still solid Q with revenue up 14.7% and profitability up 31.6%. Online continued to underperform, with revenue up just 10.9% and a huge increase in losses ($200M vs $24M). E&D was weak with a 11.5% decrease in revenue but a 22% reduction in losses (not totally surprising given the decision to hold the line on Xbox pricing versus dropping it to gain share). Looking through the .ppt, Dynamics seems to have had another ~20% growth Q. That's decent but not spectacular given market growth there. Xbox sales of just 500K units on the Q seems weak, but likely helped overall earnings. There are also some seemingly positive references to Vista adoption and premium mix, but I'll wait until I hear the cc before attempting to interpret. The stock is currently up $1.27 in AH. Maybe they should just cancel the cc versus tempting fate :-)

Post Conference Call:

Nothing earth-shattering. Several references to "excellent results" and a general sense that Liddell et al feel they've put up some good numbers - and will continue to. Foreign exchange apparently helped revenue by 2%. OEM premium mix was 71%. That's up 18%, suggesting that Vista is helping there (but a lot of it is the move away from XP MCE XP Home to Vista Home Premium given how crippled Vista Home is). WRT Vista, there was very little specific guidance. Basically, Liddell suggested that the mid single-digit PC growth expected for mature markets is the base line, plus 3 percentage points of emerging market growth/piracy reduction and minus 1-2% for a "difficult" retail comparable. So basically high single digits to low double-digit GAAP revenue growth overall (see slide #21 in the deck if interested).

The apparent reduction in Q4 guidance didn't seem to get much airplay by analysts. I guess everyone was just relieved, and didn't want to spoil the mood :-) Also given a pass in the general euphoria, was the forecast for Online next year which is extremely weak - 5-7% growth vs Q4's 10-15%. Huh? They're expecting to do even worse? Analyst Charles Dibona did question what the plan was now that "the patient had been somewhat stabilized, but even he missed this apparent non-sequitur. I may listen to the cc again later to see if I missed something there (update: a commenter pointed out that I did miss something and was mistakenly looking at the forecast for 07 vs 08 - hence the strikethru. No guidance for Online was given). Finally, if there's a disappointing takeaway from this otherwise better-than-expected call, it's that EPS will only rise slightly ahead of revenue next year. In other words, MSFT plans to keep spending away versus tightening its belt and leveraging the bottom line. If MSFT was a lean, efficient machine, and its investments were visibly paying off, that would all be well and good. But pretty obviously that isn't the case. Until that changes and the company focuses on improving efficiency/effectiveness and accelerating earnings, expect the stock to continue to lag the market. But in the short term, we should maintain at least some of tonight's AH pop following this result.

Update: Some corrections thanks to a commenter. Also, some other reviews here:

8 Comments:

  • Looks like somebody at the Reg has been reading your recent blog postings:
    http://www.theregister.co.uk/2007/04/26/microsoft_needs_a_gerstner/print.html

    By Anonymous Anonymous, at 11:55 AM  

  • Hey there...

    I must be that "ABM"er you keep talking about, as I'm the one that posts anonymous links to stories (generally negative) about Microsoft's position. I also don't include any commentary of my own.

    I don't know what an ABMer is, and I don't really care. I'm just interested in following the Microsoft story, and I frequent your blog (amongst others). I figured the stories I link to would interest you.

    Here's another:

    From The Register

    I'm not a stockholder (of Microsoft or any other stock). I'm just fascinated by the Microsoft story.

    By Anonymous Anonymous, at 1:42 PM  

  • > the forecast for Online next year which is extremely weak - 5-7% growth vs Q4's 10-15%. Huh?

    The forecast you are referencing is for the *current* fiscal 2007. There is no per business unit fiscal 2008 guidance yet - it is just a consolidated guidance.

    > but a lot of it is the move away from XP MCE

    XP MCE is considered "premium". As is XP Tablet, XP Professional, Vista Business, Vista Enteprise, Vista Ultimate and Vista Premium. Only XP Home and Vista Basic (and their emerging market downgrades) are considered non-premium. (The notion of "premium" has been used for several years when reporting Client business unit results).

    By Blogger Jeff, at 9:36 PM  

  • "The forecast you are referencing is for the *current* fiscal 2007. There is no per business unit fiscal 2008 guidance yet - it is just a consolidated guidance."

    Just reviewed it again and you are correct. Thx. I'll make a note in the post.

    "XP MCE is considered "premium"."

    Sloppy of me. Thx for catching that too.

    By Blogger MSFTextrememakeover, at 7:04 AM  

  • Slightly off topic:
    Microsoft to fuse .Net with Silverlight:
    "Publicly, Ozzie said, 'This is what I've been working on,'" O'Kelly said.

    If you liked the "iPod killer", you'll love the "flash killer".

    Considering the OS and app stack architechure problems and test/build infrastructure problems facing Windows (all largely the result of Bill G's myopia) I guess it shouldn't be surprising that BillG's hand picked successor likewise lacks a broad perspective of system software development and exudes that same myopia.

    A Chief Technology Officer really ought to be addressing bigger issues than a late and lame one-off product attempt to enter a market whose barriers to entry and likely benefits (even if a toehold in "web services" should be established) will prove cost prohibitive - again.

    By Anonymous Charles, at 6:24 AM  

  • Comments, analysis on the Yahoo news?

    By Anonymous Anonymous, at 12:16 PM  

  • You seem to know about the finance side.
    What's happening about the EU fines ?
    Does MS still pay them daily, weekly, monthly ?
    Are they paid to the EU or put in a seperate ring-fenced account?

    If (when?) we win the appeal, will we get the money back??

    How does it show up on the balance sheet ?

    Hopefully once its all sorted out the stock will jump a bit

    By Anonymous Anonymous, at 3:45 PM  

  • While 6.9 billion in stock buyback is good, I am wondering why they can't crank it up even higher? There's 22 billion set aside to do this. With execs very confident in the stock and company future etc. etc., why not start going at it 10-15+ billion for aquarter? I don't think it would throw off trade volume that much and if execs are so sure of the future, it would imply the stock is on the way up so why not buy back that 22 billion at the bargain price of $30. Hopefully MSFT just keeps making money and we'll set aside another 20 billion later on for buyback and one of these years, it will bring the price up?

    By Anonymous Anonymous, at 8:39 PM  

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