Thursday, April 24, 2008

Q3 FY08 Earnings

I may or may not be covering this in detail today. To be honest, I'm close to packing it in wrt both MSFT and this blog. However, for those who wandered over here looking for the usual review, expectations are as follows:

The Street is looking for revenue of $14.5 billion and EPS of 44 cents. The company’s guidance was for revenue of $14.3 billion to $14.6 billion, with EPS of 43-45 cents.

With the YHOO thing still hanging over us, reaction to strong results are likely to be muted. And with GOOG and AAPL having already posted blowout results, anything from MSFT will seem average by comparison - which of course it is. On the other hand, negative results and/or weak guidance will be punished severely. Personally, I expect a strong report given higher than expected PC sales. However, I think guidance will be on the modest side given the declining macro economic picture and MSFT's typical conservatism. So tomorrow, the stock may be $1 or so higher best case, or $1-$2 lower worst case. Then we'll drift along some more until the YHOO thing finally gets resolved. If that's a merger, then the stock will take a hit and be dead money for two more years. And if it's walk away, then maybe the stock goes up $2-$3 until worries about how MSFT can curb GOOG's growth without YHOO take over and drive the price back down $2-$3. In other words, yawn.


On first blush it's not great and the stock is off 5% in the after hours session presently. At $14.45 billion, revenue is in the middle (exactly) of company guidance but light versus consensus. Considering how much further the US$ fell during the Q, that's particularly weak. EPS at .47 looks to be a solid beat, but there's some noise there wrt charges and I haven't detailed what was in/out yet. The item that jumps out is that expenses came in very hot. In particular "Cost of revenue" and "General and administrative". As a result, net income fell off a cliff. Again, I haven't detailed what's behind that yet, although a billion of it looks to be accounting for the EC fine. There's a note in the .ppt that says "Operating income" would have been $5.8 billion ex the fine, which would have exceeded company guidance of $5.6-$5.7 billion. Not that investors apparently care about the distinction.

Results by segment are as follows (technology guarantee impact making compares difficult):

Again looking quickly, Client sucked. And it seems to be not just the technology guarantee impact but also anemic OEM growth. The .ppt brags about the same 140M Vista licenses sold that we've been hearing about for a while now. So clearly there's been no acceleration wrt installed base upgrades either. Surprise! Not. MBD was also weak. I haven't delved further to figure out why. Server put in a strong showing as per usual. Kudos to that group at least. And E&D managed to eke out a paper profit (as long as you ignore intra-group transfers and the convenient "Corporate-level activity" bucket).

Guidance for Q4 is $15.5-$15.8 billion. The street was expecting $15.6 billion, so nothing too negative there. But EPS guidance is .45 -.48, whereas consensus was .48. So that's a guide down.

Of course, since next fiscal provides lots of time for things to change, to beg forgiveness, or for a YHOO merger to screw up compares enough to make burying a subsequent miss easy, and since having the stock drop too far currently isn't ideal given the pending YHOO merger, the company is able to look past Q4's set back and be unreservedly bullish for FY09:

  • Revenue is expected to be in the range of $66.9 billion to $68.0 billion.
  • Operating income is expected to be in the range of $26.7 billion to $27.4 billion.
  • Diluted earnings per share are expected to be in the range of $2.13 to $2.19.

Wall Street analysts were forecasting EPS of $2.00 to $2.20 per share ($2.10 consensus), on revenue of $66.5 billion.

Buybacks during the quarter were unsurprisingly light at around $1 billion.

Sample media reaction:



Tracy notes that revenues from the Client division - the Windows business - had been expected to be down 18%-20% year over year, but actually fell 24%. He notes that Microsoft believes PC market growth was 8%-10% in the quarter, below the company’s previous estimate of 9%-11%. I would note here that other estimates of Q1 PC unit growth are higher: IDC says units grew 12.3%; Gartner says growth was 14.6%.

Minimum 20% miss versus forecast on a business this large? Not good. Who is getting fired? Kidding, we know no one will be. And who to believe wrt actual PC shipments? FWIW, I'm going with IDC and guessing a mix shift back to lower priced/lower margin XP and towards Linux in UMPCs and emerging markets is what is really responsible for the miss - which is even more concerning.

Tracy notes that the Microsoft Business Division’s revenues came in about $20 million to $30 million below expectations. He says the server and online businesses were in line with expectations. He says the entertainment and devices segment was ahead of plan, driven by strong Xbox 360 sales

You know it's a weak report overall when MSFT is reduced to playing up E&D's results.


Thank God for the last minute "surge" today, or the maximum $2 downside target that I postulated yesterday would have been exceeded on a closing basis. As it was, the stock was down more than $2 during the session. But it managed to end the day down a mere $1.97. Hopefully you appreciate the psychologically important distinction there, because I'll bet dollars to donuts a bunch more of our cash got spent in order to ensure that result. So, let's call it $18 billion of shareholder wealth destruction. Not bad for one day's work.

Having listened again to the fifty something minute excuse-fest that passed for a conference call last night, I can see why investors were dumping. If I had a dollar for every "woulda, coulda, shoulda" that was uttered, I'd be rich today instead of just poorer like most shareholders. Liddell's attempt to blame the Client shortfall in part on some mysterious piracy problem with a Chinese distributor and their "market dynamics" (which when coupled with the recent MSFT/Novell/China announcement is probably really about Linux competition), while comically maintaining that there is no Vista problem (even though the "sold" counter is moving slower than Zimbabwe's national election results), just shows how much contempt this management team has for the truth and the intelligence of its shareholders. Most companies bend the truth. That's expected. But MSFT's current management team just dispense with it entirely.

I especially got a kick out of their self-congratulations for the wise "investments" made and diversification achieved, how good they feel about the way the business is performing, and how much they will have increased EPS by - assuming they make their targets - over the past three years or so (which conveniently have now morphed from the biggest product lineup in company history being well received by customers as recently as last Q, to "one of the most difficult economic environments we've seen". Huh?). Pop quiz: What has all this supposed goodness meant for the people they have a fiduciary obligation to - shareholders? Answer: Effectively squat. Had you simply invested in the indexes over the same period, you would have had a better return with much less volatility. Extending that to 5 years, you would have outperformed MSFT by approximately 34% to 50% ex-dividends (depending on whether you chose the S&P or the NASDAQ). And let's not even bother comparing returns to companies that have actually performed for shareholders like AAPL, GOOG, HPQ, or even IBM of all people.

I wonder if I'm unique among shareholders in that I'm only ever half-listening to their tired self-serving bullshit. Meanwhile, a virtual ticker tape of MSFT's moribund stock price this decade is scrolling along in my mind, serving to negate much of what they're saying and underscoring just how out of touch with reality they are. Based on market reaction today, it looks like at least some others reached similar conclusions.

Anyway, this piece includes analysts reactions following last night's results:

There's also some additional color on the financial sinkhole that is Online in this piece:

Again, Ballmer must have a really low opinion of the average investor's IQ if he thinks we can review data like this and still believe him that MSFT has a "solid" strategy here with or without YHOO. They don't. They have another financial clusterfuck that rivals Xbox, and investors are more than smart enough to see that - which partially explains the stock action.


  • I hope you do not leave; could you take Liddell's spot????

    By Anonymous Anonymous, at 10:37 AM  

  • I can't believe so many people don't see through "Google blowout results". Umm... let's see:

    - previous time Google had a blowout results, before those results were announced, they decreased the $$ they pay out to people for ad placement
    - then they did NOT have a good quarter, and got hammered for it
    - just now - they had "blowout results"... however - they yet again lowered the payout for ads. In fact - now they are paying about 70% LESS than about 8-9 months ago

    Does that look like a healthy business practice? Their saving grace is international business of course. But I take the blowout results with a grain of salt.

    By Anonymous Anonymous, at 11:01 AM  

  • I've greatly enjoyed reading your blog. Best wishes to you in whatever you decide to do.

    By Anonymous Anonymous, at 11:59 AM  

  • As an "outsider", I've been following your blog for quite sometime, and to be honest, often wondered what exactly could be motivating you to "stay in"... Just sell your MSFT and buy something else, already! Just choose anything other than a sinking ship or a train on the wrong track... as a stock holder, you HAVE to understand and be comfortable in where the company is headed, it's product, and it's leadership. You obviously don't have any of these, nor do most of it's employees, from what I can tell. Buy Apple, and AAPL; be happy. Life is too short!

    By Anonymous MrKruser, at 12:01 PM  

  • I agree with most of what you or minimsft says.

    You've pretty much nailed down why GOOG AAPL or firefox or linux is kicking msft's ass in their core competencies, where as MSFT's core area like windows suffers with Vista.

    All point to the fact that MSFT is not performing good (neither competing against better companies) nor competing against itself.

    Why don't you guys get this message to the top management? Seems like most of MSFT's mgmt is complacent. They talk much and don't deliver. Live Mesh for example, I mean wtf. It's been there for a year now, now you are marketing it differently. Also I think msft will BENEFIT alot if it changes its philosophy from good marketing to better products, because EVENTUALLY only better products survive - marketing helps sell bad products, and but sells better products even more - so stop hiring stupid people get more GOOD QUALITY DEVELOPERS AND INTERFACE engineers. make products simple, less features so that consumers get it. not like 5k options in outlook, ABSOLUTELY HORRIBLE.

    Yahoo acquisition is absolutely retarded. More people are going to google services than yahoo ALMOST EVERY DAY. If msft' acquires yahoo, and the time they take to deliver from that point on, could further accelerate the pace at which the combined entity "clueless" microyahoo loses out to google.

    By Anonymous Anonymous, at 12:52 PM  

  • "But I take the blowout results with a grain of salt."

    Those are valid points and I guess I could add that their results were still shy of original guidance when the Q started. Nevertheless, the raw numbers (revenue and income) for both them and AAPL are clearly in a different league from MSFT. And of course we've seen the respective market reactions.

    By Blogger MSFTextrememakeover, at 3:29 PM  

  • Would hate to see you go. Obviously you are one of the few at Microsoft that still "gets it". Do tell when you can where you might land, would love to know.

    By Anonymous Anonymous, at 5:19 PM  

  • I don't know if what I'm trying to say makes any sense... but i usually come to MSFTextrememakeover by following a link from Mini MSFT.

    That said, I prefer MSFTextrememakeover over Mini because of you are clearer purpose, better (and more concise) writing and content. You also don't try to be so clever sounding (though I admit Mini does pull off some good ones :))

    Value wise, it seems you have more to say and what you say sticks. Maybe more analytical and less unbridled passion?

    Let the blog go if you don't feel the desire. It's not worth the time.

    But I do respect your analysis and opinion and say thanks for the effort and education.

    By Anonymous Anonymous, at 8:43 PM  

  • so stop hiring stupid people get more GOOD QUALITY DEVELOPERS AND INTERFACE engineers. make products simple, less features so that consumers get it. not like 5k options in outlook, ABSOLUTELY HORRIBLE.

    They have good developers. What they don't have is good leadership for their devs. Or more accurately, they have very poor leadership for their devs. The entire PM discipline has gone badly wrong. These are the people driving features and UI now. It's been a long time since developers had any real control over that. Most of the good developers have either left, or withdrawn into semi-usefull "code quality" efforts, since that's the only place they're allowed to have an influence any more.

    MSFTExtreme, don't know what to say, I feel your pain (or is it frustration, or maybe just apathy). If you pack it in, I'll miss the blog, but I understand.

    As soon as my last ESPP shares clear their tax status holding period, I'll be out. But if you're still here, I'll still drop by.

    By Anonymous Anonymous, at 11:42 PM  

  • Hope you keep blogging, I enjoy reading-but given the lack of change at MS, totally understandable you are tiring of it all.

    I'm still smiling cynically at all the crowing about the "success" of the XBox and its "rise to profitability"; conveniently ignoring not just the huge losses they chalked up with the original Xbox, but also that 1.3 Billion charge they took 2 quarters ago all at once, just to make the numbers work for the next couple quarters.

    I wondered if investors would see thru that-the stock seems to indicate they did :p

    By Anonymous Anonymous, at 10:34 AM  

  • I really appreciate your analysis—if you find you have the energy, I'll keep reading. I have a brother who's working for MS; I'm on the other coast. your site is a bridge of sorts to the tangibles in his worklife. It's another way for me to be connected.

    I also find tech extremely interesting. It's a perverse tortuous self-nipple tweak to see any company lumbering in the wrong direction. I feel about MSFT the way I did about AAPL in the late 90's. And as much as I wanted to slap it into taking the right path, the reality is that very little can be done.

    But then again change happens. Thank goodness for Roy Disney/Stanley Gold. Or Steve Jobs for that matter. Some sort of change needs to happen with MSFT. Way at the tippity top.

    By Anonymous Anonymous, at 2:13 PM  

  • I hope you do not leave; could you take Liddell's spot????
    > Amen! Liddell has IQ but lacks integrity.

    By Anonymous Anonymous, at 6:41 PM  

  • Ballmer must have a really low opinion of the average investor's IQ if he thinks we can review data like this and still believe him that MSFT has a "solid" strategy here with or without YHOO.

    I think you're overestimating Ballmer, sincerely. He actually believes his story and he really doesn't know any better. You're not seeing his opinion of your IQ but rather your seeing his IQ (and grasp of the issues).

    He knows his own expections haven't been met and he knows customers and investors want better results, but he hasn't a clue as to how large is the disconnect between his perceptions and reality.

    All his business acumen was acquired in a dysfunctional echo chamber were most of the noise emanated from Gates, and he (like Gates) is surrounded by people who are too smart to interrupt his daydream and get hit by a flying chair.

    By Anonymous Charles, at 5:41 AM  

  • So when are you expected to get fired?

    Markets have realized msft long term value. No more upside, unless Microsoft can embrace the potential of some downside, such as acquire Yahoo.

    People like you thinks to get free lunch. One can't grow money faster than safe interest rate without taking some risk. If you know a way, then you should be the richest person of all time.

    You know there are no safe bets!

    By Anonymous Anonymous, at 6:22 PM  

  • "People like you thinks to get free lunch."

    Ah, you're back. Lucky me. FYI, I was going to respond and then decided that posting your comment in full was embarrassment enough.

    By Blogger MSFTextrememakeover, at 1:00 PM  

  • "People like you thinks to get free lunch."

    A graduate of the Jar Jar Binks School of Valuation.

    By Anonymous Charles, at 4:18 PM  

  • What I have a hard time understanding is why you're still holding these shares. They've been a lousy performer ever since Ballmer got the CEO job, and there's nothing on the horizon that would break them loose and make them a growth company again. Even if you have some hope for Windows 7, put your money in higher-performing stock for the next seven years, and think about re-investing in MSFT it Windows 7 looks like it might be tolerable.


    By Blogger jcr, at 5:12 AM  

  • Just wanted to say I read you blog with interest and find your analysis more focused than mini (which is not a knock both blogs are good compliments). Best regards and please keep it up-

    By Anonymous Anonymous, at 8:53 AM  

  • Hey Extreme,
    I'll miss you if you leave.

    There are few places for internals to lean on for validation that the bizarro world we exist in at MS where ‘investment’, means ‘losing money’, is indeed not normal.

    You validate the analytical part of my brain and Mini my spiritual.

    Hope you out yourself after you bail. The press would be all over you.

    By Anonymous Anonymous, at 10:25 PM  

  • "You validate the analytical part of my brain and Mini my spiritual."

    Have to echo the same sentiments. I too have been wrestling for the better part of a year on with staying with this idiocy and I've made my decision; life is too short and the heartache here is too great. I just don't want to put up with the disappointment anymore.

    Maybe one day our paths will cross again.

    I wish you well; happiness, satisfaction and great success where ever your decision takes you. Your contributions and efforts, both internal and here are valued and appreciated.

    By Anonymous former winbuilder, at 6:33 PM  

  • I have been in and out of MSFT several times over the past few years. I never seem to make more than a few bucks off them each time. Good luck in the future with them. I will stay tuned to watch.

    By Anonymous RealWebToday, at 9:48 AM  

  • So are you still around at The 'Soft or what? I am a long time reader here and have commented on every post you've made. I left the company three weeks ago after 10 years in. I am now a VP at a partner. I have to tell you, leaving was the best decision I've ever made. Sold most everything at $30 and $32 before leaving. Now, enjoying every day so much. Actually working at a company peopled with grown ups makes all the difference. Being treated with respect, priceless. The Microsoft detox feels so good, SOOOOOO good.

    By Anonymous Anonymous, at 6:03 AM  

  • "I left the company three weeks ago after 10 years in. I am now a VP at a partner. I have to tell you, leaving was the best decision I've ever made."

    Sad for the company, but happy for you. Congrats!

    By Blogger MSFTextrememakeover, at 7:28 PM  

  • P.S. Thanks to the others for your comments. Glad the blog was of some value. I'm working on my final post. I've actually scratched an entire one already, but am hoping to get something out shortly.

    By Blogger MSFTextrememakeover, at 7:31 PM  

  • Have you given up? I used to enjoy reading your posts.

    By Anonymous Anonymous, at 9:50 PM  

  • "leaving was the best decision I've ever made"

    'Extreme, I have to admit, my experience has been the same, even in this short time. I'd go so far as to call it an epiphany period in my life!

    The freedom, the satisfaction, the people actually, sincerely thanking you for coming to their company and helping them (when was the last time that happened), the joy I'm experiencing in my life now, it is truly a revelation, a liberating experience.

    I find myself now wondering why, why did I hang on so long? And then I realize that the reason was so I could truly learn to truly appreciate how good it is to be away from the toxic success I knew as a 'Softie.

    Your life, your TRUE life awaits you outside the gates of 1 Microsoft Way!

    By Anonymous Former MS Former Winbuilder, at 6:03 PM  

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