Q2 FY08 Earnings

Preview:

Stakes heading into MSFT's report are about as high as I can remember. The punishment for companies who disappoint this earnings season has been swift and severe - just ask INTC or AAPL holders. Additionally, you have markets that are on the edge of the abyss. At the lows yesterday, the Nasdaq notched the 20% decline that signals a bear market - and the Dow and S&P weren't far behind. Luckily, buyers waded in and the subsequent rally managed to turn it into a reversal day. But signs increasingly point to the demise of the bull market that began back in 2002.

For its part, MSFT has held up amazingly well during this market meltdown. Although significantly off its recent highs, it's substantially above the $28.60 or so level it would be at had it just performed like usual (i.e. at or below the index). The risk, of course, is that we'll end up there shortly if the market takes exception to anything said tonight. Alternatively, if MSFT impresses, maybe we rally a buck and give the rest of tech at least a short term boost as well.

As a reminder, consensus is as follows:

• Revenue: $15.95B
  
• EPS: .46

See more background here:

• Microsoft expected to post sharp profit rise

The most important figure - guidance for the year - was:

• Revenue: $58.8B-$59.7B
  
• EPS: $1.78-$1.81

If MSFT backs away from that at all, we're done. Q3 compares are also going to be ugly given the benefit realized last year from the deferred Windows and Office revenue. As per usual, if the market likes the report and guidance overall, then what is primarily an accounting/timing issue will be given a pass. Otherwise, we'll see headline after headline tomorrow about "slowing growth". FWIW, Goldman is banging the drum and getting "conviction" about MSFT again ahead of earnings. They called it right last time, although their conviction was short-lived - more like an infatuation. So let's see if [newer] analyst Sarah Friar can make it 2:2, following Rick Sherlund's disastrous 0:30 record previously.

I'll be back after earnings to update this post. Meanwhile, you can check out the recent Motley Fool bull versus bear debate on MSFT, or join me in scratching your head over this development.

Results:

Very strong. Looks to be a beat of consensus and whisper numbers on both the top and bottom lines, along with raised guidance for the full year:

• Revenue: $16.37B
  
• EPS: .50

Guidance for the year:

• Revenue: $59.9B-$60.5B
  
• EPS: $1.85-$1.88

Stock is up $1.50 to $34.75 currently in AH. Back with more commentary after the cc.

 

Conference Call and 10Q analysis:

 

• 15% growth overall (net of technology guarantee impact)
• $4.1B in buybacks during the Q (leaving $8.7B remaining on the previously approved $36.2B)
• Online advertising growth of 38% (26% excluding AQNT)
• Online expenses grew even faster though
• E&D managed its third ever quarterly profit and first back to back one (now just $5.4B to go before breakeven)
• Cost of revenue dropped from 29% to 22% during the Q (yielding 21% vs 23% YOY half way through the fiscal)
• Result: operating margins increased 4% to 40%
• SharePoint grew 50% during the Q, as did Office Communication Server 
• Dynamics customer billings up 26%
• 427M Windows Live ids from 352M last year
• 22nd consecutive quarter of double-digit revenue growth for Server & Tools (very impressive)
• Over 60% of sales from users and regions outside of the US (emerging markets up nearly 30%, non-US mature up 20%)
• Unearned revenue down sequentially, but up YOY ($12.178B vs $11.861B) and $500M more than forecast
• R&D up 15% on the Q to $1.885B from $1.637B, but down a point as a percentage of revenue (and no, I'm no clearer on the value received for money spent)
• Cash + short term investment down to $21.1B from $23.4B
• Expect PC growth for the year to be 11-13% now (up 1% from previous)
• Diluted shares outstanding decreased to 9.503B from 9.942B
• Total stockholder's equity up $3.33B to $34.431B
• Not immune to global economic factors, but haven't seen any negative spillover from a weakened US economy (yet)
• Currently under audit by the IRS for tax years 2000-2006? (I must have missed this one previously)

Short version: strong results, increased guidance, generally upbeat tone, and no really embarrassing items for analysts to question. Good job! Yes, online continues to be a sinkhole for cash. But everyone is used to that by now, and at least the top line result is semi-respectable. Yes, there's still no color on actual large scale Vista deployments. But at least client revenue and unearned remains solid. Bottom line, if last report was sufficient to get some investors to take another look at MSFT, then this one should attract others and perhaps reduce doubts that last time was merely a fluke. 

 

Stock now up $1.59 to $34.84 in AH. We'll see what happens tomorrow in the regular session.

 

Update:

 

Mini has a good selection of the post earnings reviews that I normally provide here. So I won't bother duplicating that, although I'll offer one more just because I like the title:

 

• Microsoft Knocks "Financial Cover" Off The Ball

On the less-positive but still worth reading side, Henry Blodget drills into the online numbers further:

• Microsoft's Online Division: Flat Growth Rate, Still Burning Cash

For its part, the stock opened strongly ($34.90) but has given back much of that gain currently ($33.54). Volume is very high (already surpassed average daily volume).