Q1/08 Earnings

Pre Results:

Some sample commentary heading into earnings:

• Earnings Preview: Microsoft
  
• Microsoft investors eye rosy holiday quarter

The stock is having a very good day and setting highs that haven't been seen since 2002. With expectations running so high there's growing risk for disappointment. Let's hope MSFT can deliver for a change. We'll find out shortly...

[OT: BTW, for those who are interested, I think the Facebook deal is an okay one. No, Facebook isn't worth $15B by any stretch of the imagination. And no, the incremental advertising that MSFT is likely to recoup from the deal isn't worth the $240M either, especially given likely revenue-share concessions (all management bs to the contrary). So while there's a risk that this further extends MSFT's track record of money-losing investments, in this case I think you have to call it a reasonable one. Why? Because even MSFT should be able to recover half that money in incremental advertising. The 1.6% equity stake will be worth something. They get a stronger seat at the table for one of the fastest growing application platforms on the web (a huge opportunity that was also a potential threat). They send a message that they're serious (which should result in some spin-off benefits with other potential advertisers). And finally, losing Facebook would have been a huge blow to their already struggling advertising ambitions (not to mention easily shaving $240M off MSFT's marketcap). So let's call it: Competition 100: Ballmer 1. But now he's got momentum... :-)]

Results:

Wall Street was looking for $12.57B in revenue and EPS of 39 cents a share. Microsoft had guided for revenue of $12.4B to $12.6B, with EPS of 38-40 cents. FirstCall is reporting actual of $13.76B and EPS of .45 cents a share. Wow! Still waiting on confirmation via MSFT...

Confirmed: FirstCall got it right. It's a much-needed blowout:

(More after I review the actual earnings release and listen to the conference call.)

Post results and conference call:

Okay, that's done. Other key positives:

• Fastest Q1 revenue growth since 1999.
• Operating income at 30% exceeded revenue increase of 27%.
• Operating margin up ~2 points to 43%.
• As seen above, every business grew double-digits.
• Client growth exceeded overall PC growth for a change(primarily due to piracy reduction, especially in fast-growing emerging markets).
• "The OEM Premium Mix increased 16 percentage points to 75% driven by increased consumer premium mix".
• Server & Tools continued to lead in bottom line leverage (16% revenue growth but ~25% earnings growth).
• E&D managed their second ever profitable Q (only $5.8B more to go and they can start generating a net profit lifetime-to-date).
• Q2 guidance raised to $15.6B - $16.1B and EPS of .44-.46 versus consensus $15.64B and EPS of .44.
• Full year guidance raised to $58.8B-$59.7B and EPS of $1.78-$1.81 versus consensus of $57.42B and EPS of $1.73.

Negatives:

• Limited color on specific Vista adoption. Liddell says 85M units sold, or roughly 2x XP over the same timeframe. But that ignores the extended [pre-release] period during which many XP sales qualified for Vista upgrades. It's also units on a [now] much larger base, not relative adoption rate (which was the original goal). Lots of comments about "still early days" and management is comfortable with uptake (as incredulous as that sounds). Also, some proxies like overall growth rates and contract renewals - which are suggestive that Vista is having a positive impact and large-scale deployments may be nearing, but a step removed from hard data like marketshare and/or specific customer references.
• Online lost even more money (along with share). Not a huge surprise, and a $58M chunk is AQNT-related. Half of MSFT's overall $3.2B-$3.3B in capex this year will get spent in this one division. OSB revenue growth net of AQNT was just 10% (includes expected access business declines). Advertising revenue itself did better - up 25%, in line with expectations. But that's down from last Q's 33%, and way behind GOOG.
• Operating margins for the rest of year will be lower than Q1 (could be some sandbagging there, but AQNT will apparently detract some $200M from operating earnings).
• E&D growth guidance for Q2 of -8% to flat. Blaming it on earlier Q1 ramp, but something seems odd there.
• Unearned on the Balance Sheet decreased ~$1B vs Q4 (recognition also increased ~$1B vs year ago).
• Common stock repurchases decreased ($2,930B versus $7,683B).
• See increased risk of an economic slowdown.

Says CFO Liddell:

It was just a very clean quarter, outstanding financial results.

Yes it was. What a refreshing change.

Kudos to all.

BTW, MSFT traded as high as $36.02 in AH. Currently at $35.60. Nice! Lot's of open gaps on the stock chart though, which is a concern. However, if it can hold above $32 in the weeks to come, then maybe this five-year trading range is finally over.

 

Update: Made a few revisions/clarifications after listening to the cc again.

Update #2: A nice summary of analyst's reactions this morning following last night's results:

• Microsoft: Next Stop, $40?

Update #3 (10/29/07):

Hmm...that didn't take long. Finally get a pop in the stock and Director Jon Shirley sells 500K shares - 25% of his entire remaining stake. You can never say why an exec is selling for sure, but not exactly bullish on the surface. Johnson also unloads a chunk, albeit a much smaller % of total held.