tag:blogger.com,1999:blog-291954062024-03-07T12:25:52.117-08:00MSFTextrememakeoverMSFT needs an extreme makeover. Years of past success have made it fat, slow and complacent. It's time to get back into fighting shape. We don't need smaller per se, but we definitely need more effective and efficient. We also need a management team that wakes up every day remembering who they work for - shareholders.MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.comBlogger96125tag:blogger.com,1999:blog-29195406.post-59654875197176533982008-06-11T10:07:00.001-07:002008-12-08T21:05:41.795-08:00Eight Years of Wrongness<div>Warren Buffett is quoted saying that his favorite holding period for a stock is "forever". I'm not ready to go quite that far - and in practice neither does he - but I do subscribe to a long term investing philosophy generally. For example, I bought my first MSFT shares back in the early 90's. Like most holders that decade, I did very well. Then came this one, which has been an absolute disaster.</div> <div> </div> <div>It's sobering to realize that during Ballmer's term as CEO, MSFT has underperformed almost all of its top tech peers (including AAPL, IBM, HPQ, SAP, INTC, CSCO, SYMC, NOK, ORCL, ADBE, RIMM, QCOM, Ebay, and AMZN), and badly lagged the major averages. We may even see our <em>third</em> plunge to test the 2000 lows during his watch. Unbelievable. There may be another major technology CEO with an equivalent or worse track record who is still in power, but a name doesn't come readily to mind. Indeed, it’s instructive to note the four companies who didn’t make my list above: DELL, YHOO, Sony and Sun. In other words, four well-publicized flameouts/turnaround stories (depending on your perspective), <em>all</em> of which have new CEOs. Go figure.</div> <br /> <p>That performance record would be embarrassing enough on its own, but it comes <em>in spite of </em>going through an unprecedented amount of <em>our</em> cash on buybacks (nearly <a href="http://finance.yahoo.com/q/cf?s=MSFT&annual">$43 billion</a> worth in just the past three fiscal years) and other schemes that were supposed to drive the stock. It's also despite spending more on R&D than virtually anyone in the industry, and more than GOOG and AAPL combined (nearly <a href="http://finance.yahoo.com/q/is?s=MSFT&annual">$20 billion</a> in the past three fiscal years alone). Meanwhile MSFT's senior leadership have collectively been paid <em>billions</em> over this period, while leading the industry in insider selling every year (net of purchases, <em><a href="http://www.cnbc.com/id/15837285?q=msft">almost 350 million shares sold</a> </em>over just the past 5 years). <em>You</em> are expected to be patient and wait for returns over the "long term" (still undefined, but has already exceeded 10 years - think Jim Carrey in Ace Ventura and <span style="color: #0000ff"><em>“If I am not back in 5 minutes….just wait longer”<span style="color: #404040">.</span></em></span>), but <em>they</em> want their<em> </em>return up front.</p> <p>Against that backdrop, it should come as no surprise that a shareholder was recently driven to write about <span style="color: #0000ff">"<a href="http://blog.seattlepi.nwsource.com/microsoft/archives/138368.asp?source=rss">Microsoft - A Decade of Gross Corporate Negligence and Destroyed Shareholder Value</a>." </span><span style="color: #404040">It’s a good read, and kudos to Bishop for publishing it – that probably didn’t earn him any brownie points with management.</span></p> <p><span style="color: #404040"></span>FakeSteveJobs (aka Dan Lyons of Forbes) also <a href="http://fakesteve.blogspot.com/2008/05/larry-kudlow-rants-about-his-windows-pc.html">said</a> something worth reading here:</p> <blockquote> <p><em>There's something really scary in the voices here. It's in the tone. You know what I'm hearing? It's disgust. Nobody comes out and says it, but these guys are fed up with Microsoft. They're not even angry. They're just fed up. They've had it. They stuck by the company during the DOJ trial and the antitrust mess, because hey, what investor doesn't love a monopoly. The guys on Wall Street don't care if you lie, or cheat, or bully your rivals -- as long as you're winning, and making money, and as long as the stock keeps going up. <br /></em> <br /><em>What they won't stand for is fuck-ups. Incompetence. Mistakes. And the Borg has been nothing but fuck-ups for what -- three years? Listening to these investor dudes talk I'm reminded of a time in the late 1980s when Wall Street guys began ranting about Digital Equipment Corp. For years DEC had been their darling. Ken Olsen walked on water. But suddenly Ken Olsen was a doofus, an idiot. The company which once had been so powerful and so admired almost overnight came to be seen as a loser that couldn't adapt and change.</em> <br /> <br /></p> </blockquote> <p>His site is offered as humor, obviously, but he often weaves in good insight. That’s an example, imo. Certainly, there <em>has been</em> another major negative sentiment shift since the YHOO offer and the latest quarterly results. I've been a shareholder for a long time and I have never seen the stock as weak as it has been these past months. Down some ~14% more than the market on the year, fifth worst DOW 30 performer YTD, and trading at [just] 14.8x forward earnings. Looking at the chart, the uptrend line from February has been obliterated, and major support has been broken as well. We’re seeing a little relative strength these past few days, but even that looks tenuous.</p> <p>Some readers may be surprised that I was initially a Ballmer supporter. Not for CEO necessarily (I felt that he and Gates should have resigned after losing the DOJ case), but generally. I admired his tenacity and positive outlook. I still do. I'm even happy to give him credit operationally where it's deserved. For example, a good job has been done against traditional competitors in legacy markets (with the exception of Apple). On balance, after a rocky start and some noteworthy exceptions (e.g. Firefox), he has done a decent job of responding to the newer threat posed by free and open source software. Broadening MSFT's worldwide presence with foreign R&D centers is another positive on his watch, though the company is still too Redmond-centric. The addition of ERP/CRM made sense, though it’s been botched badly imo. Maybe in the fullness of MSFT-time (i.e. decades) it will live up to its potential. Gaming, well…I guess you could credibly say that it has been the only source of “cool”. It has also contributed to revenue growth, which overall has been solid under Ballmer (though the company wasn’t exactly on life-support when he took over). On the personal side, I respect him for not bailing on his shares to the degree that say Bill has (the latter will be out of the stock completely within 10 years based on his current pace of selling). And I admire his work ethic. He may well be the <a href="http://www.forbes.com/technology/2008/06/04/steve-ballmer-billionaire-tech-enter-cx_wt_0604ballmer.html">world's hardest-working billionaire</a>. Also, the most passionate. My concern is whether or not the company has been effective under his leadership. Rightly or wrongly, the buck stops with the CEO. And when I look at the <em>totality</em> of MSFT’s performance under his reign, it's not a pretty picture. In fact, it's an epic fail. </p> <p>There are too many issues to mention, but let’s review some of the real lowlights:</p> <ul> <li>Losing the DOJ and EU cases, which has resulted in $10B’s in fines and (more importantly) permanently damaged MSFT's reputation. <br /></li> <li>Failing to aggressively leverage MSFT's cash horde buying promising companies at the bottom of the dotbomb for pennies on the dollar (btw, not 20:20 hindsight on my part – I posted that MSFT should do this in real-time back then). <br /></li> <li>The Longhorn clusterf!*k. The long-term damage of which continues to this day, will never be fully quantifiable, really began the process of confidence erosion in both the management team and company more generally, and may prove to be a decisive turning point from which the company never recovers. <br /></li> <li>Allowing Xbox to dig a $6B hole in the ground. <br /></li> <li>The "emerging bets" which collectively have been a bust. <br /></li> <li>Allowing IE to stagnate after risking the company and paying $B’s in fines primarily to beat Netscape and become the browser leader. <br /></li> <li>The major opportunities that were missed while leadership was otherwise preoccupied/distracted (Search, Advertising, Web 2.0/SaaS, etc.). <br /></li> <li>Losing digital media to AAPL. <br /></li> <li>The financially-retarded one-time dividend and the ongoing stock buyback games. <br /></li> <li>The sorry performance of the stock (which has resulted in part from all of the above). <br /> <br /></li> </ul> <p>Current management tell us that the company is “stronger and better positioned today” than it was in 2000. They may even believe that, but the market clearly doesn't. And available facts support an alternate conclusion. Some examples:</p> <p>1) "Vista is a success". </p> <p>Reality: </p> <p>Management can claim it “sold” 150M licenses and call that “success”. But in virtually every other way – versus expectations, given a ridiculous 5 year gestation period and reported $5-$6B price tag, media reaction, corporate adoption, FPP retail sales, the company’s own expectations, and most important the <em>competitive need – </em>it’s a disappointment. Leadership are also blasé about the future implications that this underwhelming release may represent. I’m not. How many who have downgraded to XP - a significant number by all reports – will be harder to sell to next time? How many have switched or will consider switching to a competitor as a result? How many OEMs are pissed off and will now embrace other options like <a href="http://www.vnunet.com/vnunet/news/2218172/acer-pushes-linux-hard">Acer is doing with Linux</a>, or make comments like <a href="http://www.usatoday.com/tech/products/2008-05-28-otellini-intel_N.htm">this</a> from Intel’s Ottelini? And what about current impact? Windows marketshare, while still above 90%, has fallen to its <a href="http://apple20.blogs.fortune.cnn.com/2008/06/01/mac-hits-record-78-market-share-in-net-applications-survey/">lowest level ever</a>. And others, particularly AAPL, have been steadily gaining share. More importantly, MSFT has arguably ceded undisputed technical leadership in desktop OSes - <em>the core of what the company does</em> - to Apple. It pretty hard to underscore how much of a strategic blunder that is.</p> <p>The hope here is that Windows 7 will be the must-have product that Vista wasn’t, and the company is busy touting that promise regardless. While I’m optimistic that Sinofsky will prove more effective than his predecessor, and actually support the cone-of-silence approach he’s getting crucified for in the media currently, he doesn’t have carte blanche to make major changes - or five years to do it in - like Allchin did. I’ve long argued that MSFT needs to dump some backwards compatibility and come to market with a leaner OS to have any chance of keeping up with OS X and Linux. It should have been done with Vista, at least for a consumer version which could act as a showcase for innovation (assuming any was forthcoming). But that’s not in the cards on this iteration. So Sinofsky is going to have to focus on a few new killer features, addressing some of the major issues that still plague the Vista code base on which it will be riding, and perhaps work on the fit and finish that was so <a href="http://www.istartedsomething.com/20080611/state-of-the-taskforce/">sloppy</a> in Vista (inexcusable given the development timeframe). Bottom line? “Success” for Windows 7 will be stopping share erosion at whatever level it has dropped to by then.</p> <p>See two additional pieces here:</p> <ul> <li><a href="http://blogs.barrons.com/techtraderdaily/2008/06/10/microsoft-bernstein-trims-outlook-for-vista-adoption/">Microsoft: Bernstein Trims Outlook For Vista Adoption</a> <br /></li> </ul> <blockquote> <p>“The inescapable conclusion” of the survey, he writes, is that “support for Vista has been battered across all enterprise sizes and corporate constituencies.” He finds that “the Vista cycle looks likely to be materially less robust than indicated in our prior survey.” <br /></p> </blockquote> <ul> <li><a href="http://weblog.infoworld.com/enterprisedesktop/archives/2008/06/desktop_windows.html">Desktop Windows: Is it time to "cut and run?"</a> <br /></li> </ul> <blockquote> <p>Until now, I've been advising Vista fence-sitters to wait for Windows 7. However, last week's "big reveal," in which Microsoft finally confessed that Windows 7 will be nothing more than "<a href="http://weblog.infoworld.com/sentinel/archives/2008/06/the_myth_of_min.html"><strong>Vista warmed over</strong></a>," has forced me to reconsider my position. I'm now more convinced than ever that Windows is doomed - at least on the enterprise desktop. <br /> <br /></p> </blockquote> <div>2) "We have a solid strategy in Online". </div> <br /> <div>Reality: </div> <br /> <p>MSFT's Online efforts have been a disaster. Indeed, the company's performance has been the <em>worst</em> of the four major players - and they all managed to turn a profit versus lose billions. </p> <img id="BLOGGER_PHOTO_ID_5210679647746192994" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmOSUOkpaUwBY7TZZdkAUOLcXqozRlW1UgzUNxwSGnt5zUJguiyfl52SyE3dpzPXkuryDx7XV2ju4Bl_bf2AYUzqT0CDMoHWCUk-FjMGnScpCAa-JQMaBhaG7GxMQqZPQXgRCq/s200/Online.JPG" border="0" /> <p></p> <blockquote> <p>It has become clear the plan hasn't worked -- which is the main reason Microsoft tried to buy its way into competitiveness by acquiring Yahoo, a deal that died May 3, when Microsoft withdrew its bid for the Internet company. <br /></p> </blockquote> <p align="right"><a href="http://online.wsj.com/article/SB121097665416899745.html?mod=googlenews_wsj">WSJ</a> May 17, 2008 </p> <p>More bad news here:</p> <ul> <li><a href="http://www.alleyinsider.com/2008/5/google_to_surpass_size_of_microsoft_windows_in_2009">Google Search To Surpass Size of Microsoft Windows in 2009</a> <br /></li> </ul> <p>3) "We are winning this generation of gaming".</p> <p>Reality:</p> <p>Xbox, while more successful than Online on a comparative basis, has been a financial sinkhole of epic proportions. More than twenty billion dollars “invested” over nearly a decade, not to mention countless amounts of management’s time and “talent”, for what? If it wasn’t for creative accounting this fiscal, Xbox would <em>still</em> be unprofitable some 6-7 years and $6B-$7B in losses later. Speaking of the warranty charge that was retroactively buried into a previous fiscal, here’s a <a href="http://www.eetimes.com/news/semi/showArticle.jhtml;jsessionid=HH11KNICK0PDAQSNDLSCKHA?articleID=208403010">report</a> on what was really to blame. Short form: to save perhaps $10M’s, MSFT designed the graphics chip in-house rather than using an outside expert – eventually resulting in the $1B+ warranty/recall charge. Smart. And remember that hasty and breathless PR release a few weeks ago about being “first to reach 10M units in the US” and this metric historically determining the winner? Well, that was because Nintendo was set to <a href="http://www.vgchartz.com/">reach that figure and surpass MSFT a few weeks later</a>. Bottom line, in all likelihood MSFT will finish this console round dead last of three:</p> <p><img id="BLOGGER_PHOTO_ID_5211410254866667298" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhSEfYm2r8rt15oa11-b3xNfzuPLyhSvK2jZCeV6x2GzB_bOXfrTBXYRG3qfyyJhn0dcfWeISHhhVoRoL_6082lIsvRxIqqE3nklMT-HcRFuytcc5gtxzrqhTXjhyphenhyphenIGGekkAZst/s320/Xbox.JPG" border="0" /></p> <p>4) "We can reach 40% share in smartphones".</p> <p>Reality:</p> <p>Microsoft has been pursuing mobile in some form or other for nearly a <em>decade</em>. The result? A distant 3rd to 5th place depending on whose figures you use. And while there has been better success in the smartphone sub-segment, Apple has surpassed MSFT there in less than one year, at least for North America (MSFT still holds a lead worldwide, though I will be surprised if that holds up through 2010). </p> <img id="BLOGGER_PHOTO_ID_5210678900901675250" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_CpUUGFfWdKZPvzB4o1WpQP5Dg3TAwlPcN7DoLr1M8bwhHszfTsicVi1ZZ5pSrLjeH_d67FLAC2QK0yyn8oe9B583XhtrlCwInIXNzxn3dHlV9Voj8aaw2KzW5qUCKPMw29MK/s200/181623-275-251.jpg" border="0" /> <br />And with the $500M Danger acquisition, we can assume that Mobile would join the stable of unprofitable MSFT “investments” if costs actually got apportioned properly. Unfortunately they don’t (gotta love those inter-group transfers and that convenient “Corporate Activity” slop bucket for everything else), and MSFT doesn’t break out the detail for Mobile anymore regardless (or ERP/ CRM). <br /> <br /> <p>More <a href="http://www.informationweek.com/blog/main/archives/2008/05/microsoft_boast.html">here</a>:</p> <blockquote> <p>Considering this set of competitors, I don't think Microsoft has a snowball's chance in hell of reaching 40% of the global market for smartphones. Not in four years, not ever.</p> </blockquote> <p>5) “We have the best browser”</p> <p>Reality:</p> <p>I’m not sure what leadership means by best. Fastest? Not on most benchmarks I’ve seen. Most standard? No, although the team is at least trying to catch up. Smallest/fastest install? Um, no. Best mobile experience? Not according to most reviewers. While I’m on it, how did AAPL get to market with a better mobile browser than Microsoft, the browser leader? Additionally, why hasn’t Microsoft bought and incorporated <a href="http://www.ie7pro.com/">IE7 Pro</a> – <em>the</em> must have add-on for IE? Right now, the average IE user has to do without this functionality or, if they hear about IE7 Pro and go to download it, they get prompted to select GOOG as their search engine. Brilliant.</p> <p>Meanwhile, Firefox closes in on <a href="http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9091959">20% share</a>.</p> <p>6) “Zune is succeeding”</p> <p>Reality:</p> <img id="BLOGGER_PHOTO_ID_5210679242803976914" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3WlxNyUi98tYRXMAkhWMQlVT8kWWTMVc4quEPPA3eLMj6cjnMEWEM6ECT0FQDP8P5XbIi9KpTPaZEZGySo5gu1jSIaIIOoLS-xw_X3_t-x2JPJ3YSCppGXjThipSWjk1DtwfA/s200/mp3.JPG" border="0" /> <br /> <p>Okay, you get the picture. I won’t go into detail on all of the rest like IPTV (10 years, $10B invested, still no material return), etc. </p> <p>What do you think current perception of MSFT would be like if:</p> <ul> <li>Vista had been the must-have upgrade it should have been? <br /></li> <li>The company had embraced the internet and led the move to SaaS versus resisting both? <br /></li> <li>Online had managed to at least turn a profit, if not hold share? <br /></li> <li>Xbox was leading this round of gaming and was <em>actually</em> profitable versus just creatively so? <br /></li> <li>Windows Mobile had generated even half the excitement that the iPhone has? </li> </ul> <p>Do you think that maybe the annual P/E chart wouldn’t show this clear downtrend, which keeps negating the positive impact on share price that otherwise might be expected from what little earnings gains have occurred?:</p> <p><img id="BLOGGER_PHOTO_ID_5210673291218774482" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfSJDfnibQfqI0WZ_BgFNXm6A25y5DCh8u1HYCVmCp0ggs2x0fjaVnTXnCZnN1EKvCbrCut0422sdAwl4ktwf0MiyNyJsECy9xQ6zIdHGJ0ArEzAveLMZcgRmUYXmczjFnnlAl/s400/pe.JPG" border="0" /> </p> <p>Meanwhile, look at some other critically important metrics:</p> <p>Efficiency:</p> <p>Back in 2000, MSFT was one of the industry leaders in both revenue and profit per employee. Now <a href="http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=ManagementEfficiency&Symbol=MSFT">look</a>. While it’s still above average in income, revenue per employee is actually <em>below</em> the S&P average. Compare that to AAPL, who matches the S&P figure for revenue/employee – and they don’t have the leverage of the OEM model that MSFT does. </p> <p>Brand:</p> <br /> <p><img id="BLOGGER_PHOTO_ID_5210673589360625474" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgpax5knxh-0zPUlPlUsLs4WlTBaSs0qiFGBtDQo2vvtBqVaNPbDjwvenJh1gZU2NYhjZALn8cQpABD8Tmlf3iogXoNoQVISw3qZ69HBtuootWq5WcBeXN9k0Zo3phYjtS2IFdr/s400/Core.jpg" border="0" /> </p> <p>When you trail IBM, you know you have a problem. </p> <p>Marketing:</p> <p>As I’ve noted before, Microsoft’s marketing is an embarrassment. Their PR is too, but that’s another matter. Perhaps the most glaring example of this is the failure to respond to Apple’s PC/Mac TV ads, something that Gates denied is having a negative impact as recently as the D conference a few weeks ago. Huh? Earth to Bill, come in. This is the same company that wants to be a leader in advertising, right? And the one spending $300 million to makeover its image? </p> <blockquote> <p>"Nobody messes with anyone in the tech industry the way Apple has messed with Microsoft," says Enderle. "It's the first time I've ever seen a major national campaign that disparages a competitor, and the competitor just sits back and takes it. If somebody tried to do that to Oracle, you wouldn't be able to find the body." <br /> <br /></p> </blockquote> <p>Help may be on the <a href="http://www.fastcompany.com/magazine/126/believe-it-or-not-hes-a-pc.html?page=0,0">way</a>, but why did it take so long? Why has the company allowed AAPL to effectively define MSFT’s <em>own</em> brand in a negative fashion? Why was it Lenovo, not MSFT, who came up with a <a href="http://www.youtube.com/watch?v=_hnOCUkbix0">smart counter ad</a>? How come MSFT’s Vista marketing team hasn’t been able to come up with something compelling like <a href="http://www.youtube.com/watch?v=jeHIjRUzvkc">this</a> (albeit a little rough), even though Robert McLaws was able to do so <a href="http://www.windows-now.com/blogs/robert/archive/2008/05/26/31-days-of-the-hdx-dragon-contest-and-the-winner-is.aspx">by simply offering readers of his blog a chance to win a PC</a>?</p> <p>Conclusion:</p> <p>Like many, I have been holding out hope that MSFT would gets its act together. In the first two fiscal quarters that looked like it might be happening. But then the wheels came off the wagon and it’s been down hill ever since. I’m not just talking about the ill-advised and poorly handled YHOO bid. I think a lot of folks, myself included, reassessed after Q3 and wondered how others (AAPL, GOOG, less so HPQ, etc.) have been able to sustain successive growth and earnings surprises for <em>years</em> in some cases on the back of modest R&D expenditures and new product/service offerings, and yet <em>the largest R&D spend and product line up in MSFT's history </em>wasn't able to deliver even three consecutive quarters of the same. </p> <p>As a stock, MSFT is done - stick a fork in it. And not just past and present, which has seen the terrible performance mentioned and is the reason, for example, that the QQQQ <a href="http://seekingalpha.com/article/79704-is-anything-preventing-powershares-qqq-from-hitting-55?source=news_sitemap">underweights MSFT in favor of overweighting AAPL and others</a> (despite its mandate to track the index). I mean moving forward. If you want dividends, there are far better plays. And if want equity appreciation instead, make a list of MSFT’s top competitors, throw a dart at it, and invest in whoever you hit. More rationally, buy the index or one of the technology-specific ETFs. Either way, you’ll likely do much better over the next 5 years <em>and</em> have less volatility. </p> <p>As a company, MSFT will obviously continue on for some time. But I will be surprised if 3-5 years from now (maximum), growth in the cash cows hasn’t come to a screeching halt and the company hasn’t been forced to layoff at least 10% of its employees. </p> <p>All of this assumes Ballmer is still at the helm of course, which sadly is a good bet:</p> <ul> <li><a href="http://www.informationweek.com/news/windows/operatingsystems/showArticle.jhtml?articleID=208402027&subSection=News">Microsoft CEO Steve Ballmer To Step Down Within 10 Years</a> </li> </ul> <p>Don’t misunderstand, he isn’t <em>the</em> source of all that’s wrong. But he is the enabler that allows it to continue (with the acquiescence of our do nothing Board of Directors).</p> <p>So under a Ballmer-led administration, expect more of the same. Specifically, a general lack of accountability and urgency within the senior management ranks, a myopic strategic focus on protecting the cash cows while paradoxically paying inadequate attention to the actual products themselves, a related failure to spot new trends and get out in front of them (invariably resulting in a desperate, expensive, and often unsuccessful attempt to play catch up later), a staggering annual R&D spend that produces lots of research papers but a shockingly small number of promising technologies and even fewer successful new products, variable execution that runs from great to poor but is on average weak, a marketing effort that is simply atrocious, a bunch of very expensive "investments" that have best-case paybacks measured in decades and appear to be almost totally focused on driving <em>revenue</em> not <em>income</em>, and of course the ever-present maniacal focus on the latest competitor du jour, whose market the company currently covets or feels threatened by. </p> <p>Meanwhile, OSS, AAPL, and others, will continue chipping away at the legacy cash cows, gaining share and driving down margins even where share is retained. So in addition to continued PE compression, there’s a good chance that “E” itself may start to decline as well. </p> <p>So it's time for me to listen to the fat lady who has been singing for years now, and finally pull the plug. I can't keep waiting another 11 years for MSFT's leadership to deliver the returns that say AAPL's have in just the past 12 months, despite struggling (and that's on top of 2000+% this decade). I'm also increasingly concerned that under this leadership team the long-term flatline will eventually be resolved to the downside versus the up, with all the implications for additional shareholder value destruction that implies. As <a href="http://seekingalpha.com/article/80660-the-market-sees-microsoft-losing-its-grip">one pundit</a> summarized it:</p> <blockquote> <p>In short, I think the market sees Microsoft losing its grip on computer users and having nothing to take its place when those users start leaving. Jack's right that they haven't started leaving in droves yet, but the market is a forward looking mechanism and senses that at Microsoft there's a greater chance of ramping down than ramping up. <br /> <br /></p> </blockquote> <p>So with that, I announce the end of my MSFTextrememakeover blogging career. The timing seems right as this is my 100th post. Good luck to all those who continue to hold MSFT. I also wish the very best to MSFT's employees, especially folks like Mini-Microsoft, Dare Obasanjo, and others who have pushed for change from the bottom up at some considerable risk to their careers. Ditto folks on product teams like Live Writer, etc. who somehow managed to get something great out the door despite the obvious organizational dysfunction. Finally, thanks to media folks like Todd Bishop, David Hunter, and others who cited me from time to time and got others to read my input for whatever it was worth - which apparently wasn't much.</p> <p>Anyway, best wishes to all. <em>Extreme out</em>.</p> <p> </p> <p><strong>Update:</strong></p> <ul> <li><a href="http://www.extremetech.com/article2/0,1558,2317347,00.asp">Ten Reasons Why Steve Ballmer Should Be Fired</a> (step down is sufficient) <br /></li> <li><a href="http://www.winextra.com/2008/06/11/some-thoughts-on-a-microsoft-after-gates/">Some thoughts on a Microsoft after Gates</a> (and not just because he mentions me) <br /></li> <li><a href="http://www.istartedsomething.com/20080612/ux-taskforce-theyre-listening/">UX Taskforce: they’re listening</a> (Here’s a thought: Why doesn’t someone senior in the Windows group <em>publicly</em> acknowledge that they’ve taken this feedback and are working on it? Ed Bott <a href="http://www.edbott.com/weblog/?p=2011">thinks</a> it’s pretty amazing, and he seems to know a thing or two about Vista. Oh, and sending a message that “we’re listening to our customers”, especially when they’re offering to help you <strike>fix your mistakes</strike> improve your product and for free, couldn’t hurt right? Fake it if you have to, you could use the positive PR) <br /></li> <li><a href="http://www.tradingmarkets.com/.site/news/Stock%20News/1677841/">Microsoft Declares Quarterly Dividend</a> (our thimbles runneth over) </li> </ul> <p><strong>Update #2:</strong></p> <ul> <li><a href="http://blogs.wsj.com/deals/2008/06/12/who-played-it-worse-microsoft-or-yahoo/">Who Played It Worse: Microsoft or Yahoo?</a> <br /></li> </ul> <p>Excerpt:</p> <blockquote> <p>Yahoo destroyed itself to save itself. Microsoft tried to get stronger, but only ended up exposing its own weakness. Somehow Google emerged triumphant, effectively neutralizing its two biggest competitors. <br /></p> </blockquote> <ul> <li><a href="http://www.fool.com/investing/value/2008/06/13/microsofts-anti-google-survival-guide.aspx">Microsoft's Anti-Google Survival Guide</a> <br /></li> </ul> <p>Excerpt:</p> <blockquote> <p>Buying international properties outright may be tricky, but buying up minority stakes in overseas leaders such as <strong>Baidu.com</strong> (Nasdaq: <a href="http://caps.fool.com/Ticker/BIDU.aspx?source=icaedilnk9950012">BIDU</a>) in China, or Russia's Yandex, will give you a toehold in faster-growing markets abroad.</p> </blockquote> <p>Ya think?:</p> <p><img id="BLOGGER_PHOTO_ID_5211406810099190130" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEho1-KT-oRA38oWtG-1vShXtXtMUN95NyxInZxqf5Y95meQnARNl1avoBY9lCIexvBzQoX-SSs5egPUNY0EngqsOrbSTIkfgAivu8cqQpDUF6aOJ0NxDQIVeD_PMr00BstkMBHp/s320/world2008growth.png" border="0" /></p> <br /> <p></p> <img id="BLOGGER_PHOTO_ID_5211445368526821666" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwQ1UNnox25MsDQbahHCbhDfjSRBA3OViaavTm26tXAoWoLHQijljM85ZHikuSolQPsAplzIDEkoCRqw8LdsO_Qm4fowPm0M0ptnfO_QZVfwF4JPyFFeaaUSrx2SWqmpoD9Nky/s320/world2008pop.png" border="0" /> <br /> <ul> <li><a href="http://blogs.barrons.com/techtraderdaily/2008/06/13/microsoft-four-ways-to-improve-the-business/">Microsoft: Four Ways To Improve The Business</a></li> </ul> <p>Excerpt:</p> <blockquote> <p>Here’s his four-part plan for energizing the company: </p> <ul> <li><strong>Innovate!</strong> “Multi-year investor concerns about the company’s ability to innovate have only increased in recent times,” he writes. “Outside of the “Surface” product, we have seen little from the company that could be labeled as being truly innovative. Innovation is key in boosting opportunities for Microsoft and in its battle against threats from Open Source software, SaaS, Online Advertising, Apple, Google, etc.” </li> <li><strong>Stop taking the iterative approach to product development.</strong> He asserts that “the ‘Hey, that was only Version 1′ approach to building software and products is ancient and creates a flood of unwanted negative publicity – Zune 1.0, Vista/SP1 are just some examples.” Parakh says that a key here is “a flawless user experience the first time any product is launched.” </li> <li><strong>They need a new branding strategy.</strong> “The use of Microsoft and Windows for corporate products is fine,” he writes. “However, anecdotal conversations with multiple individuals reveals that the use of Microsoft or Windows while branding consumer focused products increases the likelihood of a negative perception of the product (even if unwarranted), thanks to the immense negative publicity (news media, Mac/PC ads) received over the last several months and years.” </li> <li><strong>20% time?</strong> “Microsoft also needs to be nimbler in responding to the competitive environment and provide increased latitude for employees seeking to innovate.” </li> </ul></blockquote> MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com76tag:blogger.com,1999:blog-29195406.post-33140121402393078762008-04-24T09:51:00.001-07:002009-02-25T00:24:57.371-08:00Q3 FY08 Earnings<p>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, <a href="http://blogs.barrons.com/techtraderdaily/2008/04/24/microsoft-higher-reports-earnings-after-the-close/">expectations</a> are as follows:</p><blockquote><p>The Street is looking for revenue of $14.5 billion and EPS of 44 cents. <a href="http://blogs.barrons.com/techtraderdaily/2008/01/24/microsoft-fy-q2-tops-high-end-of-guidance-raises-fy-2008-estimates-stock-jumps-after-hours/?mod=BOLBlog">The company’s guidance</a> was for revenue of $14.3 billion to $14.6 billion, with EPS of 43-45 cents.<br /></p></blockquote><p>With the YHOO thing <em>still</em> 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. </p><p><strong>Results:</strong></p><p>On <a href="http://www.microsoft.com/msft/earnings/FY08/earn_rel_q3_08.mspx">first blush</a> 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 <em>very hot</em>. 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.</p><p>Results by segment are as follows (technology guarantee impact making compares difficult):</p><img id="BLOGGER_PHOTO_ID_5192936170809741058" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1yMblf7FVEzRILqRyhUx4eDVozgDz1pV4823pAVeWEIIkg6SlB80ASxeS_G4WDV5x_5i2CtRzVA0mVjelEcjJGFXL5A9lHPUXkfhmNMOEjRwFC7SoC7gcqSTCC7v3iAxgUJWe/s400/Capture7.JPG" border="0" /> <p></p><p>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).</p><p>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 <strong>guide down</strong>.</p><p>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:</p><ul><li>Revenue is expected to be in the range of $66.9 billion to $68.0 billion.<br /><li>Operating income is expected to be in the range of $26.7 billion to $27.4 billion.<br /><li>Diluted earnings per share are expected to be in the range of $2.13 to $2.19.</li></ul><p>Wall Street analysts were forecasting EPS of $2.00 to $2.20 per share ($2.10 consensus), on revenue of $66.5 billion. </p><p>Buybacks during the quarter were unsurprisingly light at around $1 billion.</p><p>Sample media reaction:</p><ul><li><a href="http://www.foxbusiness.com/markets/industries/technology/article/microsofts-revenue-4q-outlook-disappoint-street_578718_12.html">Microsoft's Revenue, 4Q Outlook Disappoint the Street</a> <li><a href="http://www.reuters.com/article/ousivMolt/idUSWNAS970220080424">Microsoft quarter view disappoints, bullish on '09</a> <li><a href="http://www.alleyinsider.com/2008/4/live_analysis_microsoft_fq3_earnings_after_the_close">LIVE ANALYSIS: Microsoft FQ3 Weaker Than Expected</a></li></ul><p>And:</p><ul><li><a href="http://blogs.barrons.com/techtraderdaily/2008/04/24/microsoft-fy-q3-windows-demand-falls-short-of-forecast/">Microsoft: FY Q3 Windows Demand Falls Short Of Forecast</a></li></ul><p>Excerpts:</p><blockquote><p>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%.</p></blockquote><p>Minimum 20% miss versus forecast on a business <em>this</em> 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 <em>really</em> responsible for the miss - which is even more concerning.<br /> <blockquote><p>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</p></blockquote><p>You know it's a weak report overall when MSFT is reduced to playing up E&D's results. </p><p><strong></strong> </p><p><strong>Update:</strong></p><p>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 <em>mere</em> $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.</p><p>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 <em>really</em> 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. </p><p>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 <em>fiduciary obligation</em> to - shareholders? Answer: Effectively squat. Had you simply invested in the indexes over the same period, you would have had a better return with <em>much less</em> 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 <em>performed</em> for shareholders like AAPL, GOOG, HPQ, or even IBM of all people. </p><p>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 <em>decade</em> 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. </p><p>Anyway, this piece includes analysts reactions following last night's results:</p><ul><li><a href="http://blogs.barrons.com/techtraderdaily/2008/04/25/microsoft-shares-stumble-earnings-a-mix-bag-xbox-strong-but-windows-disappoints-waiting-for-yahoo/">Microsoft Shares Stumble; Earnings A Mix Bag; Xbox Strong, But Windows Disappoints; Waiting For Yahoo</a></li></ul><p>There's also some additional color on the financial sinkhole that is Online in this piece:</p><ul><li><a href="http://www.alleyinsider.com/2008/4/microsoft_cuts_outlook_for_msn_online_display_ads_weakening">Microsoft Cuts Outlook for MSN, Online Display Ads Weakening</a></li></ul><p>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.</p>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com26tag:blogger.com,1999:blog-29195406.post-80786581812789636872008-04-02T11:38:00.001-07:002008-12-08T21:05:43.471-08:00Is the Sleeping Giant Finally Waking Up, or Just Rolling Over?<div> <p>In the movie <a href="http://imdb.com/title/tt0066473/">Tora! Tora! Tora!</a>, when Japanese Vice-Admiral Isoroku Yamamoto is presented with the news that Pearl Harbor has successfully been attacked, he doesn't gloat. Instead, he shows great prescience and says:</p> <blockquote> <p><em>I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve.</em><br><br></p></blockquote> <p>For several months now, I've been trying to determine whether the increasing successful attacks of competitors are finally waking MSFT up and relighting the fire, or whether the company is just putting more pillows over its head so that it can keep dreaming about the good ol' days of the late 90's - the corporate equivalent of a child's "<font color="#0000ff">can't hear you</font>". </p> <p>Support for the latter proposition is nearly endless, and I'll return to that in a bit. In fact, it's so abundant that my willingness to consider an alternate reality is itself ipso facto evidence of possible self-delusion. Holding the stock will do that to you. Nevertheless, there is some support for that view, albeit that it's much harder to come by. Case in point, this ZDNet article by Dana Gardner, who interestingly isn't much of a MSFT fan - which gives it all the more credibility:</p> <ul> <li><a href="http://blogs.zdnet.com/Gardner/?p=2618">It’s good news, bad news: Microsoft gets its Internet act together</a></li></ul> <p>Excerpt: (bolding mine):</p> <blockquote> <p><em>The Google fear on the business model disruption, the Apple fear on the client disruption, and the Amazon fear on the cloud disruption, seems to be making Microsoft do what anti-trust regulators, Java, open source developers, Linux, Firefox, OpenDocument, IBM/Eclipse, Novell, and a chorus of Microsoft bashers like myself have been trying for many years. <strong>And that is ultimately to save Microsoft from itself.</strong></em><br><br></p></blockquote> <p>Halllalulah on that last one. The piece contains several great links that are also worth a read, including this <a href="http://scobleizer.com/2008/03/06/microsofts-hits-multiple-internet-home-runs/">one</a> by former softie Robert Scoble. </p> <p>Unfortunately, there's the flip side that I mentioned earlier. Let's skip over the usual stuff like an <a href="http://www.computerworld.com/action/article.do?command=viewArticleBasic&taxonomyName=desktop_applications&articleId=9071099&taxonomyId=86&intsrc=kc_top">Excel bug</a>, a <a href="http://www.crn.com/security/206905442">Word bug</a> to keep that one company, a long-ignored <a href="http://www.channelregister.co.uk/2008/03/26/jet_database_engine_security_flaws/">Jet bug</a>, and <a href="http://blogs.zdnet.com/hardware/?p=1536&page=2">embarrassing IE performance scores</a> (btw, can someone also tell me why IE - both 7 and 8 - choke on a large number of favorites when Opera, Firefox, and even Safari do not? Or why Safari can come to market with better standards support and a better mobile experience in less time than IE, and - at the risk of answering my own question - why MSFT hasn't ripped the browser out of the OS where it should never have been put in the first place?). I'm not even specifically focused on <a href="http://www.computerworld.com/action/article.do?command=viewArticleBasic&taxonomyName=windows&articleId=9070578&taxonomyId=125&intsrc=kc_top">news</a> of <a href="http://www.informationweek.com/story/showArticle.jhtml?articleID=206904946">all the drivers that are still problematic for Vista SP1</a> along with <a href="http://www.microsoft-watch.com/content/vista/a_vista_service_pack_1_story.html?kc=MWRSS02129TX1K0000535">failed</a> install stories. After all, that was true of XP SP2 initially too, and God forbid that MSFT would improve over time - especially when this version of the OS is struggling so visibly. </p> <p>No, the things that <em>really</em> concern me are reports of <a href="http://seattletimes.nwsource.com/html/microsoft/2004301551_btdownload24.html">declining reputation</a> and other <a href="http://arstechnica.com/news.ars/post/20080331-survey-apple-most-inspirational-brand-microsoft-stodgy.html">branding issues</a>:</p> <blockquote> <p><em>Microsoft also came out on top when customers were asked to choose which company to rebrand. "It's gone from innovative and bold to stodgy and a follower," said one respondent. "But rebranding is only one step since it really needs a major shift in how it thinks."</em> </p></blockquote> <p>Or <a href="http://blogs.zdnet.com/hardware/?p=1520">how much additional share the MAC is picking up</a> - here's a further nice <a href="http://blogs.barrons.com/techtraderdaily/2008/03/26/apple-rally-extends-report-gartner-hears-3g-iphone-orders-nyc-stores-sold-out-ftn-midwest-ups-ests/?mod=BOLBlog">quote</a> to ponder on that score:</p> <blockquote> <p><em>Huberty notes that a recent higher education survey shows Apple’s mind share tracks well ahead of the current market share - 40% of college students plan to buy a Mac, while just 15% actually have one so far.</em></p></blockquote> <p>Mary Jo Foley <a href="http://blogs.zdnet.com/microsoft/?p=1303">has</a> a timely piece quoting Forrester and saying forget the noise, "Windows still totally and completely rules the enterprise roost". That may be true, but it's a very shortsighted view of things. IMO, if MSFT continues to sit back and let Apple lead technically (or at least from a user experience perspective - the phrase <em>every</em> convert I know uses to describe it is simply "<font color="#ff0000">I love it</font>") and clobber the Windows brand from a marketing standpoint, then it's only a matter of time before consumer success for AAPL translates into business success as well. </p> <p>Then you have the <a href="http://biz.yahoo.com/ap/080401/linux_pcs.html?.v=1">recent trend towards low cost portables</a>, like the Asus Eee, with Linux as the default (and where Vista is a non-starter both price-wise and especially resource-wise). And the very concerning possibility that with the iPhone, Apple may have <a href="http://www.nytimes.com/2008/03/13/technology/personaltech/13pogue-email.html?_r=1&oref=slogin">given birth to an entire new platform</a> - taking a page right out of Microsoft's own Windows play book. </p> <p>Another concern, though unsurprising, is Ballmer's absence from Barron's list of the <a href="http://online.barrons.com/article/SB120615216221756939.html?mod=9_0031_b_this_weeks_magazine_main&page=sp">world's best CEOs</a>. Was it the failure to "deliver for shareholders", or the inability to be seen as an "excellent manager", that kiboshed his inclusion? Guilty on both charges would be my own input. Is the Board really so out of touch that it doesn't recognize the connection between confidence in the CEO and bullishness in the stock? Maybe they need a more concrete example - like the <a href="http://moneycentral.msn.com/detail/stock_quote?Symbol=qqqq">top holdings of the QQQQ as a percentage of net assets</a>? Hmm...that is meant to be the tracking stock of a marketcap weighted index right? So, er, shouldn't MSFT be weighted higher than AAPL? </p> <p>And finally we have the whopper, the YHOO bid, <a href="http://www.marketwatch.com/news/story/yahoo-upgraded-buy-sweeter-microsoft/story.aspx?guid=%7B16ECADB1-F21C-4447-95C2-0802508B75D0%7D">now rumored to be going to $34</a> - or maybe <a href="http://kara.allthingsd.com/20080330/what-microhoo-might-be-like/">$36</a> - despite the already ridiculous premium of the current offer, ongoing executive and senior sales departures (the latter apparently coinciding with the annual bonus being paid out in March - go figure), comScore data showing continued search share erosion, <a href="http://www.tradingmarkets.com/.site/news/Stock%20News/1232160/">the Alibaba folks wanting to trigger a contract clause that allows them to buyout YHOO's stake in the event of a takeover</a> (particularly concerning since the Asian holdings are perhaps YHOO's strongest asset), <a href="http://blog.wired.com/business/2008/03/yahoo-teams-up.html">childish anti-MSFT antics</a>, and fantasy growth projections like this:</p><img id="BLOGGER_PHOTO_ID_5184719471098952866" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgn6i_ttmj-dMfH31qnxl_gWwuGn1aTfw7R3xf0Xjn0LfgoeUz2mJea9-Xoi4n4RJPIJ1S-Qj4VyWCInTCyRTv6yEs8XsMMNVXzUAx3f_fF_fPLgqgPQNq7fYLgvew1-zPrh0R0/s320/f38938f38938z0005.gif" border="0"><br> <p></p> <p></p> <p>Take a look at the data below, and ask yourself whether pursuing the same "me too, just worse" strategy that has failed dismally so far, only in a super-sized and even more shareholder-hostile version via Microhoo, is likely to yield a different result?</p><br><img id="BLOGGER_PHOTO_ID_5184719737386925234" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJJfJPjndehADU7C-AtgvL4-sgI74mwnXOvIjLeS7t7aLlhmFc-If431joydVhE_E7Q7W4rGG65-aUxx-05bmFKh50Qg4CwQwtxyqGTK4M4DgChduCUoFmCDo8HnTt-InaNX25/s320/comscore-search-countries.png" border="0"><br> <p></p> <p>Anyway, in trying to answer the subject question of this piece, I went back and reread an <a href="http://msftextrememakeover.blogspot.com/2007/03/for-want-of-shoe-or-time-for-new-rider.html">earlier post</a> where I laid out what MSFT needed to do imo to turn itself around (lest you thought all I did was complain). It has been just over one year since I wrote that piece and two things struck me after reviewing it: 1) It stands up pretty well despite the passage of time (read: I would change very little, though I'm of course biased) and 2) There <em>has</em> been progress in some areas (implicit as well as explicit). That's a <strong>positive</strong>. But complicating the analysis - and one of the main problems - is that MSFT (the company) never appears to be on <em>one</em> singular path. Instead, you have to divine the direction of the whole by assembling various often conflicting crumbs of information from the constituent parts. As <a href="http://seattlepi.nwsource.com/business/357027_software31.html">this</a> article notes: </p> <blockquote> <p><em>"Microsoft's left hand and right hand don't ever talk to each other -- but if they did? Whoa, watch out," he said.</em></p></blockquote> <p>How does the leadership of a company this disorganized and literally tripping over itself with respect to its go-to-market messages, branding, advertising, etc. (think Live, for example), convince itself that it can be the leader in helping others hone their image and advertising online? Maybe back in the 90's, companies would have sidled up for some insight from the master. Today, that master would be <a href="http://www.reuters.com/article/marketsNews/idUSL2850164020080331">Apple</a>, or less so GOOG, and the value of getting strategy/marketing advice from MSFT is pretty unclear - except possibly so you can do the exact opposite. For example, consider the following from this <a href="http://www.news.com/8301-13860_3-9901142-56.html?tag=newsmap">article</a>:</p> <blockquote> <p>"<em>We are working with a broad cross section of our product groups," he said, adding that evangelizing Silverlight across the company is still a challenge, even though CEO Steve Ballmer has highlighted the technology as key to its future. "It's a big ship to start turning around."</em> </p></blockquote> <p>Huh? Is the captain in charge and running the "ship", or is this the Exxon Valdez? Or how about a quote from <a href="http://blog.seattlepi.nwsource.com/microsoft/archives/135419.asp?source=rss">this</a> one:</p> <blockquote> <p><em>That's all I'll say, but you can easily imagine how we can take those things -- music, some of the things we do with Zune; games, with what we do with Xbox and Xbox Live; things that we would do with the PC and the Web, with Windows Vista and Windows Live; what people do in business with Exchange, with Office -- and how we'll make those things really come to life on mobile devices, in the right way for a mobile device.</em></p></blockquote> <p><em>Imagining</em> that requires no effort whatsoever. What's difficult to understand is why it hasn't been <em>done</em> already? Was someone actually content with being a distant #3 (or having say a whopping 1% marketshare in China) before Apple came along and kicked everyone's butt? Predictably, now that the latter has occurred, the company is finally mobilizing (sorry for the pun there) and spending vast sums to acquire Danger, license Flash from Adobe, and doing whatever else comes to mind - including playing for time by making <a href="http://community.winsupersite.com/blogs/paul/archive/2008/04/02/what-s-the-deal-with-windows-mobile.aspx">forward looking announcements and even creating fictitious and misleading UI shots</a> - to try and get back in the game. And the PR machine is pumping out "Mobile momentum" pieces almost daily, while Mr. Credibility himself, Robbie Bach, <a href="http://www.reuters.com/article/ousiv/idUSN2434172120080324">assures us</a> that MSFT will gain more share. Recall what that normally means in Bachspeak - more $$$ going the wrong way.</p> <p>Anyway, all of this is a rather long way of saying that after looking at the data for and against, I think the giant <em>is</em> awakening. That's something, and potentially constructive. However, my concern is that the <em>breadth</em> of that change is still too limited and the overall <em>pace</em> of change is grossly inadequate. Like Nero fiddling while Rome burned, Ballmer seems to be preoccupied with GOOG while MSFT melts down - or at least while the first embers, which had already been apparent for years, now threaten to turn into something much more serious. Hence the recent ill-advised and fiscally irresponsible YHOO bid. </p> <p>Barring a leadership change (which sadly isn't in the cards), MSFT's best bet is seemingly that <a href="http://money.cnn.com/2008/03/27/magazines/fortune/future_tech_stocks.fortune/index.htm?section=money_topstories">emerging market growth</a> bails the company out long enough to get its act together (a tall order given the competition there from Linux, along with heavily discounted MS pricing). Because at this rate, it's going to take current management <em>at least</em> several more years that they don't have to get there - assuming they ever do. Meanwhile, AAPL, GOOG, and others (Firefox, etc.) are going to continue to grab significant additional share in their respective markets - much of it at MSFT's expense - based on current momentum alone (not to mention their generally better strategy, agility, efficiency and execution). Against that backdrop, don't expect the stock to cease its now five-year plus flatline.</p> <p> </p> <p><strong>Update:</strong> Related developments...</p> <ul> <li><a href="http://venturebeat.com/2008/04/04/real-threat-or-tactic-yahoos-stock-plummets-on-threat-of-microsoft-pulling-bid/">Real threat or tactic? Yahoo’s stock plummets on threat of Microsoft pulling bid.</a> (I'll guess "tactic", unfortunately, but at least it suggests MSFT may finally be prepared to play hardball)</li> <li><a href="http://seekingalpha.com/article/71145-microsoft-s-savvy-open-source-move">Microsoft's Savvy Open Source Move</a> (this is smart)</li> <li><a href="http://itmanagement.earthweb.com/entdev/article.php/11070_3738416_1">Killing XP: Microsoft's Fatal Error</a> (this one not so much)</li> <li><a href="http://neowin.net/news/main/08/04/03/who-uses-ms-live-search">Who uses MS Live Search?</a> (scary if correct)</li> <li><a href="http://www.microsoft.com/presspass/features/2008/apr08/04-03xpeos.mspx">Microsoft Announces Extended Availability of Windows XP Home for ULCPCs</a> (surprise! not)</li> <li><a href="http://www.networkworld.com/news/2007/050807-with-yahoo-deal-off-what.html?page=1">With Yahoo deal off, what next for Microsoft?</a> (talk about premature, but still a good read). Excerpt:</li></ul> <blockquote> <p>Michael Gartenberg, vice president and research director at Jupiter Research, suggested that rather than acquire or partner another company to gain ground on Google, Microsoft should turn inward and focus on execution of its own online strategy. The company has developed innovative online services behind the scenes but has been slow getting those out to users, he said.</p></blockquote> <p>FWIW, while I agree with Gartenberg that MSFT has some innovative online services that need to get out the door faster, focusing internally on the current strategy isn't the answer. That's what the company <em>has</em> been doing for the past several years and it has been an abject failure. MSFT needs to quit the "me too, just worse" strategy. Instead, it needs to go back to basics. Forget the envious dreams about GOOG's $ signs. What <em>customer</em> isn't currently being well served? What are <em>their</em> needs that aren't being met? What unique <em>core competencies</em> does MSFT have that it can bring to the table? What partners exist who, for their own reasons, would want to align with MSFT and could be leveraged? Execute on that, and while MSFT many not ever dislodge GOOG, it could at least start to grow share - which is more than it has been able to do so far, despite years spent and billions lost.</p></div> MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com9tag:blogger.com,1999:blog-29195406.post-50019949475274844702008-02-29T11:28:00.001-08:002008-12-08T21:05:43.656-08:00Breaking News: CVP Will Poole Certifies Another Laptop as Vista "Capable"<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXr8FKl4cqTmRcD_5RG95ndM58qTu9dyZBTcpzy6VFckbOGi1FeMI07RKIKwjR8fczOaD-v2crE7hmvX-BGXXkIxlB41Rr9sBdbn5v_fHGQl2pJEtrsLX5uAqF3kXMbCjnKMsa/s1600-h/2-29-08-busted-laptop.jpg"><img id="BLOGGER_PHOTO_ID_5172486552135601186" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXr8FKl4cqTmRcD_5RG95ndM58qTu9dyZBTcpzy6VFckbOGi1FeMI07RKIKwjR8fczOaD-v2crE7hmvX-BGXXkIxlB41Rr9sBdbn5v_fHGQl2pJEtrsLX5uAqF3kXMbCjnKMsa/s320/2-29-08-busted-laptop.jpg" border="0"></a><br><br> <p>Granted, you may not get the "full" experience - though some might argue that the difference will be marginal. However, it will mean another chip sale for INTC. And isn't that all that matters?</p> <p>Seriously, what an embarrassment. See the story that Todd Bishop broke here:</p> <ul> <li><a href="http://blog.seattlepi.nwsource.com/microsoft/archives/132891.asp?source=rss">Full text: Microsoft execs on Vista problems</a></li></ul> <p>Additional coverage <em>everywhere</em> else including:</p> <ul> <li><a href="http://www.bloomberg.com/apps/news?pid=20601103&sid=aakoxXKmuWwU&refer=us">Microsoft Changed Vista Rules for Intel, E-Mail Says</a> <li><a href="http://www.informationweek.com/blog/main/archives/2008/02/microsoft_combi.html">Microsoft Combined With Intel For A Vista Logo Disaster</a><br> <li><a href="http://www.pcmag.com/article2/0,2704,2271620,00.asp">Why Did Microsoft Favor Intel Over Users?</a></li></ul> <p>I suppose there's some way to spin this in a positive direction - and no doubt MSFT leadership will try. Here's their first lame attempt:</p> <blockquote> <p>Throughout this process, Microsoft employees raised concerns and addressed issues with the intent to make this program better for our business partners and valuable for consumers. That's the sort of exchange we want to encourage. And in the end, we believe we succeeded in achieving both objectives.</p></blockquote> <p>Unfortunately, the record appears to show that while employees raised the concerns (to their credit), they were overruled by senior leadership. In other words, there was a willful decision to screw over customers and even OEM partners in order to placate INTC. Great judgement call if that's the case.</p> <p>At least the Sinofsky summation shows there's hope for Windows - and the company more generally - under his leadership. </p> <p>I'm not a lawyer, but these revelations would appear to be more than sufficient for the plaintiffs to win their pending class action lawsuit. So expect another $500M+ eventual judgement. Which makes the following all the more prescient:</p> <blockquote> <p>In a February 2006 e-mail, Robin Leonard, a Microsoft employee, wrote that Wal-Mart officials were "extremely disappointed in the fact that the standards were lowered and feel like customer confusion will ensue."</p> <p>She added later, "Please give this some consideration; it would be a lot less costly to do the right thing for the customer than to spend dollars on the back end trying to fix the problem."</p></blockquote> <p>"Do the right thing for the customer". Now <em>there's</em> a concept. So will anyone senior get fired for having seemingly done the <em>wrong</em> thing for customers, thereby damaging perceptions of Microsoft and its most important product in the process? Of course not.</p> <p>Not coincidentally, MSFT is <a href="http://www.microsoft.com/presspass/features/2008/feb08/02-28BrooksQA.mspx?rss_fdn=TopStories">dropping Vista prices for retail skus</a>; A move that is long overdue since the pricing there is ridiculous and sales have been <a href="http://www.news.com/Running-the-numbers-on-Vista/2100-1016_3-6207375.html">abysmal</a>.</p> <p>All in all, a nice cap to a rotten week of <a href="http://money.aol.com/news/articles/_a/record-eu-fine-for-microsoft/n20080227145909990003">news</a> and stock action for MSFT.</p></div> MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com16tag:blogger.com,1999:blog-29195406.post-32251426233475879092008-02-23T13:34:00.001-08:002008-02-26T08:02:13.506-08:00Awooga, Awooga... Abandon Ship!<p>What do you do when you find yourself aboard the USS Caine and unable to locate enough fellow deckhands willing to stage a mutiny? Why, abandon ship of course. And that's what MSFT shareholders have been doing - in droves. I wonder if Ballmer is holed up somewhere right now, in front of the Board of Directors, with a scene like <a href="http://www.youtube.com/watch?v=O9KlQPX1qiE">this</a> playing out? Okay, maybe not. Must be my excitement over the upcoming Academy Awards talking. Reality is probably more like Alfred E. Neuman's <a href="http://www.mchenrycountyblog.com/uploaded_images/What-me-worry-715603.jpg">"What, Me Worry?"</a> anyway.</p> <p>Meanwhile, MSFT shareholders are paying the price - a $73,000,000,000 tab in just the past three months ($85B if you go back to the peak in Oct.). Of course, some of that was the mysterious inability of the stock to hold its rally coming out of the strong earnings report - something that had already gotten my <em>spidey senses</em> tingling and waiting for the inevitable "bad news" shoe to drop. No way anyone knew something was up in advance, right? Like say, YHOO's and MSFT's M&A advisors from Wall Street? But if you want to explain that away as just market related, compare and contrast how HPQ fared in an equally bad environment following their strong report (I'll come back to them later). Then you have the market meltdown itself, which <em>is </em>responsible for a good chunk of the loss. And finally you have the <a href="http://pivotalinvesting.com/index.php/tech-talk/34-tech/162-isnt-it-ironic-yah%20oos-top-investors-dont-want-microsoft-to-raise-bid">massive fallout</a> from the YHOO deal. A few billion here, another few billion there, $40B+ on top of that, and pretty soon you're talking serious money. </p> <p>Consider the implications, for a moment, that if I left you with just two clues: "MSFT" and "$27.68" (it actually hit $27.20 intraday), I could be talking about 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, or now 2008. That's right, the stock has hit that level at some point during <em>each</em> of those years. How can anyone <em>still</em> be a CEO with a track record like that? Ballmer is like a small child who, having been told not to put their hand on a hot element, continues to do so anyway. Only in this case, it's our hand that repeatedly gets burned. Or - at the risk of belaboring the point and overextending the child analogy - maybe he's like the teenager who wants money for a home recording studio because he decided on a whim that he's the next <a href="http://movies.yahoo.com/movie/1808406395/info">Ray</a>, or for a boxing ring in the back yard because he's convinced he's the next <a href="http://www.imdb.com/title/tt0075148/">Rocky</a>, or for a big-ticket plane to park in the driveway because he watched <a href="http://en.wikipedia.org/wiki/Top_Gun_(film)">Top Gun</a> and figures he could be the next Maverick. All of which end up going to waste, due to the subsequent half-assed dedication and limited attention span.</p> <p>Funnily, this post was originally going to be about how maybe, just <em>maybe</em>, Microsoft was finally getting past the denial stage it has been in for most of this decade, and starting to acknowledge - and even get serious about attempting to fix - its many obvious problems. Now admittedly, you had to make like Andy Dufresne in <a href="http://www.imdb.com/title/tt0111161/">The Shawshank Redemption</a> and swim through a river of [MSFT executive and pr] crap to get there - truth still being anathema to current management. But there had been a series of moves recently that struck me as atypical: the YHOO bid - no matter how ill-advised (confirming that MSFT's Online efforts have failed miserably), the <a href="http://blog.seattlepi.nwsource.com/microsoft/archives/131757.asp?source=rss">Danger acquisition</a> - no matter how costly (acknowledging that Windows Mobile is being clobbered by the iPhone in the consumer space and is now at risk to even stay an also-ran in the business market, despite nearly a decade of investment), Ballmer admitting to having had "fits and starts" in the Xbox business (translation: it has been one ginourmous clusterf$k, which looks to be getting worse not better), several <a href="http://www.news.com/8301-13860_3-9871715-56.html">executive departures</a> in areas that are all clearly struggling - dare I say some long overdue executive accountability? (I would even have entertained right-sizing the exec ranks, if it wasn't for the fact that they promptly turned around and minted even more VPs via promotions. Gotta keep that agility-sucking "top <strike>500</strike>", er... "top <strike>800</strike>", er... "top 1000", 1200?, in tact), and finally - gasp! - Ballmer acknowledging that AAPL is kicking MSFT's butt and that they need to do "more to market Windows" (wow, and that only took a few <em>years</em> of AAPL bombarding the public with Windows-bashing ads and increasing their marketshare at MSFT's expense). </p> <p>FWIW, I attributed all of this to either fear (i.e. MSFT has seen the future and doesn't like the view) or MSFT management finally getting sick of being a punch line for most of this decade - the edge going to the former (not that it much matters if the end result was achieved). But somewhere along the way I started to doubt my entire premise. Maybe I just saw what I wanted to? Which is why you're getting this post instead. After all, what right-thinking management team with problems like those below, would turn around and make a huge offer to buy someone even more screwed up?:</p> <p><em>Windows</em></p> <ul> <li><a href="http://blogs.zdnet.com/microsoft/?p=1212">Vista SP1: The hits just keep coming</a> <li><a href="http://dailyapps.net/2008/02/windows-vista-sp1-to-break-apps-just-like-vista-did/">Windows Vista SP1 To Break Apps Just Like Vista Did!</a> <li><a href="http://www.hunterstrat.com/news/2008/02/17/wave-goodbye-to-microsofts-windows-anytime-upgrade/">Wave goodbye to Microsoft’s Windows Anytime Upgrade </a> <li><a href="http://chris.pirillo.com/2008/02/14/50-reasons-to-switch-from-microsoft-windows-to-apples-mac-os-x/">50 Reasons to Switch from Microsoft Windows to Apple’s Mac OS X</a> <li><a href="http://www.msnbc.msn.com/id/23322174">Microsoft class action suit over Vista approved</a></li></ul> <p><em>Home Server</em></p> <ul> <li><a href="http://www.dailytech.com/Windows+Home+Server+Still+Crippled+By+Corruption+Issues/article10809.htm">Windows Home Server Still Crippled By Corruption Issues</a></li></ul> <p><em>Live</em></p> <p></p> <ul> <li><a href="http://blogs.computerworld.com/why_ray_ozzie_cant_save_microsoft">Why Ray Ozzie can't save Microsoft</a></li></ul> <p><em>Office/CRM</em></p> <ul> <li><a href="http://www.infoworld.com/article/08/02/21/Document-format-battle-takes-shape_1.html">Document format battle takes shape ahead of meeting</a> <li><a href="http://news.zdnet.co.uk/software/0,1000000121,39292492,00.htm?r=1">Microsoft: IBM masterminded OOXML failure</a> <li><a href="http://www.forbes.com/2008/02/22/mitra-zoho-india-tech-inter-cx_sm_0222mitra.html?partner=msn">The Smartest Unknown Indian Entrepreneur</a></li></ul> <p><em>Xbox</em></p> <p></p> <ul> <li><a href="http://tech.monstersandcritics.com/news/article_1391468.php/Sonys_PS3_overtakes_Xbox_360_in_US_sales">Sony's PS3 overtakes Xbox 360 in US sales</a> <li><a href="http://www.smartmoney.com/news/on/index.cfm?story=ON-20080214-000867-1211">Microsoft Offers 'Mea Culpa' For XBox Market Share Loss</a>(copping to incompetence in forecasting, apparently being preferable to admitting lack of competitiveness) <li><a href="http://www.ps3center.net/story-1694-PS3-Outsold-Xbox-360-In-First-14-Months.html">PS3 Outsold Xbox 360 In First 14 Months</a> <li><a href="http://ps3.qj.net/EA-predicts-2008-hardware-sales-expects-PS3-to-be-on-top/pg/49/aid/112958">EA predicts 2008 hardware sales, expects PS3 to be on top</a> <li><a href="http://www.alleyinsider.com/2008/2/gaming_consoles_wii_to_dominate_sales_this_year_ps3_next_year">Gaming Consoles: Wii To Dominate Sales This Year, PS3 Next Year</a> <li><a href="http://www.theinquirer.net/gb/inquirer/news/2008/02/15/xbox-falure-rate-per-cent">Xbox failure rate is around 16 per cent and rising</a></a> <li><a href="http://www.roughlydrafted.com/2008/02/21/lessons-from-the-death-of-hd-dvd/">Lessons from the Death of HD-DVD</a></li></ul> <p><em>Zune</em></p> <p></p> <ul> <li><a href="http://www.alleyinsider.com/2008/2/apple_ipod_sales_to_take_off">Apple iPod Sales To Take Off Again? (AAPL)</a> </li></ul> <p><em>Online</em></p> <ul> <li><a href="http://paul.kedrosky.com/archives/2008/02/21/search_trends_g.html">Search Trends: Google Advances in Latest Search Data</a></li></ul> <p><em>Mobile</em></p> <ul> <li><a href="http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9061178">Apple beats Microsoft, Motorola in Q4 phone sales</a> <li><a href="http://www.extremetech.com/article2/0,1697,2259606,00.asp">Screw Windows Mobile, I'm Getting an iPhone</a> <li><a href="http://blogs.computerworld.com/for_microsoft_danger_indeed">For Microsoft: Danger, indeed</a> <li><a href="http://www.roughlydrafted.com/RD/RDM.Tech.Q1.07/50755EA6-A759-42FD-84ED-EBB5A060AF16.html">The Spectacular Failure of WinCE and Windows Mobile</a></li></ul> <p><em>Marketing</em></p> <ul> <li><a href="http://www.hunterstrat.com/news/2008/02/17/microsoft-rebrands-healthcare-software-as-amalga/">Microsoft rebrands healthcare software as Amalga </a>(Amazing that they didn't go with "Phlegm" instead) </li></ul> <p><em>Legal</em></p> <ul> <li><a href="http://www.nzherald.co.nz/category/story.cfm?c_id=55&objectid=10493874&ref=rss">Microsoft move doesn't solve product-tying issue - EU</a> <li><a href="http://blogs.computerworld.com/u_k_will_investigate_microsoft_for_consumer_rights_violations">U.K. will investigate Microsoft for consumer rights violations</a></li></ul> <p>And that - believe it or not - is just a quick sampling. Wouldn't it be an idea to maybe get your <em>own</em> clearly dysfunctional and threatened house in order first, before embarking on trying to clean up someone else's? Is there any doubt that management's credibility would be higher, and the market would be responding more favorably to the proposed deal currently, if that had been true?</p> <p>Ballmer, imo, has one opportunity to get things back on track. Given the hostility of the YHOO Board to the offer, the list of good people <a href="http://www.alleyinsider.com/2008/2/yahoo_layoffs">jumping ship or being pushed</a>, the <a href="http://www.alleyinsider.com/2008/2/how_much_will_yahoo_s_new_severance_plan_cost_microsoft_">severance programs</a> being put in place that would add billions more to the cost of this already insanely valued deal, its <a href="http://www.comscore.com/press/release.asp?press=2068">declining share</a> in search, recession risk in <a href="http://www.alleyinsider.com/2008/2/google_very_exposed_to_us_recession__expert">this space broadly</a>, and the <a href="http://www.reuters.com/article/technologyNews/idUSN1760137520080217">clear message</a> being sent by <em>MSFT</em> shareholders, Ballmer should revoke the proposal. Just sail away. Chalk it up as a somewhat successful ramming of an enemy cruiser (even if you had to disable, at least temporarily, a few of your aircraft carriers to do it), and leave them to sink via additional shareholders lawsuits and customer/employee defections. Maybe buy just the parts you really wanted at some future date - for ten cents on the dollar versus a 60% premium - when they're on the block and being sold as scrap. And yes, give up your dreams of blowing up the GOOG battleship anytime soon. Like the <a href="http://www.imdb.com/title/tt0054310/">Bismark</a>, you let that one get built and sail out of port right under your nose. But instead of chasing it recklessly now, maybe see if you can manage to successfully maneuver your own little destroyer-minesweeper for a change, without taking on water continuously and using shareholder cash to fuel the bilge pumps. Perhaps - and I'm just spit-balling here, like Jack Nicholson in <a href="http://www.imdb.com/title/tt0104257/">A Few Good Men</a> - use some of those $10B's in R&D every year to<em> </em>actually<em> innovate</em> and say, eventually make battleships obsolete? Oh, and do a mea culpa to all shareholders and set about making the <em>current</em> MSFT the best fighting vessel it can be. 'Cause it sure ain't there currently.</p> <p>Meanwhile, accepting the Oscar for best CEO is... envelope please - HPQ's Mark Hurd:</p> <h3></h3> <ul> <li><a href="http://money.cnn.com/2008/02/20/technology/hp.fortune/index.htm?postversion=2008022009">Hewlett-Packard CEO: We can do even better</a></li></ul> <p>Excerpts:</p> <blockquote> <p>It's just that the CEO who may be the best big-company operator in the country is all about making uncomfortable observations that so far have ended up being the right call for his company: Market share isn't the best goal to shoot for; even good businesses need to be examined carefully (especially their cost structures); and strategy and execution trump vision any day of the week.</p></blockquote> <p><font color="#404040">(Take special note of the "cost structures" and "strategy and execution" parts)</font></p> <p><font color="#404040">And,</font></p> <blockquote> <p>Hurd doesn't talk about the competition.</p></blockquote> <p>How refreshing. </p> <blockquote> <p>He boils down the CEO's responsibilities to three tasks: setting strategy (not offering a vision); aligning operations and modeling ways to execute on the strategy; get the best team to help the CEO. "There are a thousand distractions that keep you from doing that," he says. But that's where the focus needs to be.</p></blockquote> <p>Pretty clearly, Ballmer has too many "distractions" as it is. The last thing he needs is another super-sized one. That said, will he be smart enough to recognize that and disengage? Sadly, I doubt it. Egos are now involved. So the silver lining is that this decision is big enough and reckless enough that if/when it goes forward, he'll either rule the ocean if it succeeds or be scuttled when it fails. And since we've seen this movie before, odds heavily favor the latter. Let's hope there's enough of the ship left by then to resurrect. Maybe Captain Hurd will be looking for a new berth by then...</p> MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com16tag:blogger.com,1999:blog-29195406.post-55882731607238073022008-02-10T16:28:00.001-08:002008-02-11T15:51:30.430-08:00Reprieve, Or Just Haggling On Final Price?<p>Word over the weekend (from various sources) is that YHOO's Board is set to reject MSFT's bid on Monday:</p> <p></p> <ul> <li><a href="http://online.wsj.com/article/SB120257515426256541.html?mod=hps_us_whats_news">Yahoo Board to Reject Microsoft Bid</a></li></ul> <p>If true, you have to wonder what YHOO leadership's real intention is here. Could they possibly be even less concerned about their shareholder's welfare than say, our management, and stupid enough to flat out reject an offer <em>this lucrative</em>? I guess it's possible, but they'd better have one hell of a consolation prize waiting behind door #2 for their owners. If it's just a <a href="http://en.wikipedia.org/wiki/Let's_Make_a_Deal">zonk</a>, a massive shareholder lawsuit will soon follow, and the current management and BOD would be well advised to start updating their resumes. If a prize is in the offing, how will it be financed? Outsourcing search ads to GOOG, as has been rumored, doesn't seem sufficient to generate the short-term funds required to pay holders a significant one-time dividend or equivalent. In fact, any hook up with GOOG is going to face a tough time passing regulatory muster. So will YHOO take on debt to do something like that? Sell a partial ownership stake to someone else? Other? Unclear, but interesting. </p> <p>Of course, this could be - and mostly likely is - just a negotiation ploy. YHOO's Board may well be resigned to being MSFT's Valentine in the final analysis, but figure they might as well hold out for chocolates and roses in addition to that $44.6B dinner originally offered (now subsequently devalued as the price of MSFT shares has dropped). If that's the case, common sense would suggest dialing down the "they're trying to steal us" rhetoric - especially in light of a 60% premium to market bid that several pundits have described as "insane", and which MSFT holders liked so much they promptly chopped $40B+ off the company's marketcap. </p> <p>And what's Ballmer's next move upon a formal rejection? Now that he has opened this veritable Pandora's box, in the process destroying that aforementioned MSFT shareholder value, is he going to simply shut the lid and walk away? Sorry folks, early April Fools' joke? While that's likely best for MSFT holders, certainly short-term, it's not likely to enhance his credibility - and he isn't exactly swimming in an abundance to begin with. Will he choose to turn it upside down and shake it instead, bypassing YHOO management altogether and going directly to shareholders - a true hostile takeover that drags on for months? That'll help the stock price. Not! Or will he try to appease the evil spirits, order up those chocolates and roses (and, at the rumored $40 price, dessert wine, a fur stole, a diamond ring, etc.), and just add it to our tab? Capital Research no doubt had <a href="http://www.alleyinsider.com/2008/02/another-reason-msft-wont-raise-yhoo-offer-capital-research-1.html">something to say</a> about that one - thank God. But I suspect that Ballmer will still bring the offer back up to the at least the original $31 valuation, and will probably go another 10-15% above that. </p> <p>As a sanity check - or more accurately insanity check - if he ends up going all the way to $40, the deal would now be worth ~$53.6B. Not counting the additional billions here or there in advisor fees and other miscellaneous transaction costs, that would result in the originally envisioned (and abusively dilutive) "600M" of newly minted MSFT shares swelling to ~938M+ - or almost a 10% overall dilution. And we didn't even get the chocolates, roses and dinner first...</p> <p>I have a better idea. Let's get someone to see the value in MSFT that Ballmer has kept so well hidden these past 8 years, and offer <em>us</em> a 60% premium. Given Friday's close, that would put us at $45.69 - or just about 20% down from where we were when Ballmer first took over as CEO in '00. Surely someone would like us to be their Valentine? We aren't cheap, but we have redeeming virtues. And we won't be ungrateful and accuse you of trying to "steal" us. </p> <p> </p> <p><strong>Update:</strong></p> <p>It's <a href="http://yhoo.client.shareholder.com/press/releasedetail.cfm?ReleaseID=293129">official</a>, YHOO has rejected the offer as too low:</p> <ul> <li><a href="http://online.wsj.com/article/SB120273921745558817.html?mod=googlenews_wsj">Yahoo Rejects Microsoft Bid, Leaves Room for Further Talks</a></li></ul> <p>(though they did dial down the rhetoric from that used in the weekend's convenient advance leak). </p> <p>Some numbers and background on what YHOO is really worth courtesy of Henry Blodget:</p> <ul> <li><a href="http://www.alleyinsider.com/2008/2/yahoo_s__massively_undervalued__hooey">Sorry, But $31 Does Not "Massively Undervalue" Yahoo</a></li></ul> <p>(The range btw is $21-$26, and that's using optimistic numbers and assumptions. It's also on a standalone basis. As part of MSFT, YHOO's results would enjoy MSFT's multiple. For example, "35X 2009 estimated EPS = $26", would become "16* 2009 estimated EPS = <strong>$11.88</strong>"<strong> </strong>using MSFT's current multiple - give or take any "synergies", of course. Recall what I said in an earlier post about an eventual $1-$2/share goodwill write down for MSFT if this deal goes through? Now you see how that could result)</p> <p>Not surprisingly, <a href="http://moneycentral.msn.com/detail/stock_quote?Symbol=MSFT">MSFT</a> is selling off further on the news. Consensus expectation appears to be that MSFT will make a higher counter offer - at least before trying other more aggressive measures. In other words, dig in - it's going to be a while, and the stock is going lower before it's done.</p> <p> </p> <p><strong>Update #2:</strong></p> <p>MSFT officially responds:</p> <ul> <li><a href="http://biz.yahoo.com/prnews/080211/aqm241.html?.v=2">Microsoft Responds to Yahoo! Announcement</a></li></ul> <p>("Good" news? Not upping the original offer, despite the subsequent devaluation - to around $29 and change for each share of YHOO. Bad news? Still want the deal. Read: will likely do so eventually)</p> <p>Also worth a read:</p> <ul> <li><a href="http://blogs.barrons.com/techtraderdaily/2008/02/11/microsoft-yahoos-response-to-offer-is-unfortunate-warns-it-could-take-other-steps-no-new-bid/">Microsoft: Yahoo’s Response To Offer Is “Unfortunate;” Warns It Could Take Other Steps; No New Bid</a></li></ul> <p>Excerpt:</p> <blockquote>Concludes Havens: “It’s not a question of whether they will be acquired, but at what price, and how long will it take.”</blockquote> MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com10tag:blogger.com,1999:blog-29195406.post-8092360528956928672008-02-07T16:47:00.001-08:002008-12-08T21:05:44.076-08:00Media Roundup<div>1) Mark Cuban wades in: <ul><br> <li><a href="http://www.blogmaverick.com/2008/02/03/why-yahoo-should-say-yes-to-microsoft">Why Yahoo should say Yes to MicroSoft</a><br><br></li></ul> <p>(I respect Cuban, but he must not own MSFT shares)</p> <p>2) Review of various integration scenarios:</p> <ul> <li><a href="http://www.forbes.com/2008/02/07/microsoft-yahoo-merger-tech-intel-cx_bc_0206megadeal.html?partner=msn">How To Put Together MicroHoo</a><br><br></li></ul> <p>(#1 role model: HP/Compaq. Um, didn't that one initially screw up so badly that the stock nosedived and the original CEO got the boot? On second thought...)</p> <p>3) Others, besides YHOO's owners, who stand to make a killing:</p> <ul> <li><a href="http://www.marketwatch.com/news/story/microsoft-yahoo-bankers-eye-1/story.aspx?guid=%7BB983264D%2DF139%2D41A8%2D8D40%2D0F8DA92CE877%7D&dist=TNMostRead">Microsoft, Yahoo bankers eye $1 billion payday</a><br><br></li></ul> <p>(MSFT shareholders get to supply the blood)</p> <p>4) An absolutely <em>scathing</em> review of MSFT:</p> <ul> <li><a href="http://www.theglobeandmail.com/servlet/story/RTGAM.20080205.wvox0206/BNStory/Business/columnists">No joy for Microsoft shareholders in Yahoo</a><br><br></li></ul> <p>Excerpt (bolding mine):</p> <blockquote> <p>Ask investors what they think of Microsoft's innovative juices. The company's stock market value is huge – $280-billion (U.S.) – but it goes for 15 times earnings. Compare that to a far less profitable information company like Thomson Corp., which has no true monopolies (and is a part-owner of this newspaper). At a 10th the market cap, Thomson changes hands for 21 times forward earnings.<br></p> <p><strong>Why? We would argue that it's at least in part because Thomson is much more careful with shareholders' money. Thomson investors are rarely diluted by acquisitions or by squandered investments.</strong> <strong>It's hard to argue with millions of investors.</strong><br><br></p></blockquote> <p>(Hmm..less "careful with shareholder money"? √ Constantly diluting us by "acquisitions or by squandered investments"? √√ Arguing with millions of investors? √√√).</p> <p>5) The most succinct but insightful comment I've seen yet on this market space. Ballmer would be well advised to pay attention to the same input:</p> <ul> <li><a href="http://www.alleyinsider.com/2008/02/yahoo-vet-millard-microsoft-deal-was-inevitable.html">Yahoo Vet Millard: Microsoft Deal Was "Inevitable" (MSFT, YHOO, MSO)</a><br><br></li></ul> <p>Excerpt (bolding mine):</p> <blockquote> <p>Yahoo lost sight of who they are and who their customers are. Yahoo's perception is that their only competitor is Google. But 95 percent of their revenue comes from advertising -- so their competitors are really the broadcast TV networks. <strong>They think they're in the search game,when they should really be in the brand advertising game.</strong><br><br></p></blockquote> <p>(Oh, and hire this person)</p> <p>6) Analyst Trip Chowdry provides some comic relief with a fantasy conspiracy theory worthy of Oliver Stone:</p> <ul> <li><a href="http://www.marketwatch.com/news/story/analyst-says-microsofts-yahoo-bid/story.aspx?guid=%7BD61FED24%2DB3FD%2D41EF%2DAD85%2DCF06CAFDE3B6%7D&siteid=yhoof">Analyst: Microsoft's Yahoo bid may be fake</a><br><br></li></ul> <p>(If only Ballmer were that strategic and cunning. He's neither.)<br><br></p> <p>7) The sad reality:</p> <ul> <li><a href="http://www.alleyinsider.com/2008/02/analyst-70-chance-for-msftyhoo-deal.html">Analyst: 70% Chance For MSFT-YHOO Deal</a><br><br></li></ul> <p>(Near 100% chance MSFT shareholders lose money either way though)</p> <p>8) Finally, the no-brainer trade now that MSFT management have effectively told us they've revisited the future and that what appeared to be incredibly bright initially, turned out to be just the approaching headlights of a Mack truck traveling full tilt with glamour tags reading:</p> <ul> <li><a href="http://moneycentral.msn.com/detail/stock_quote?Symbol=GOOG">GOOG</a><br><br></li></ul> <p>(Cue sound of air horn)</p> <p>Meanwhile, another selloff for <a href="http://moneycentral.msn.com/detail/stock_quote?Symbol=MSFT">MSFT</a> on 2X average daily volume:</p><br> <p><img id="BLOGGER_PHOTO_ID_5164409497350686850" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWC1qx-CBffEGMjzrLH5uU2PySHTPTF2XYtUkLw7kbQNpAnZ88uTFZfLJRud5kiFA2NOpHQUCwMWhZqe1eX_gJc_1owfaXhS-5xwO8t2QqgzA2mz6Dd3BljC55hma1lhabWpMV/s320/Capture.JPG" border="0"></p></div> <p> </p> <p><strong>Update:</strong></p> <p>Worth a read...</p> <ul> <li><a href="http://www.businessweek.com/technology/content/feb2008/tc2008027_990635.htm?campaign_id=yhoo">An Open Letter to Steve Ballmer</a></li></ul> <p>Excerpt:</p> <blockquote> <p>I know you want to make your mark on Microsoft, but you should stop trying to be all things to all people. Take a tip on focus from that other Steve.</p> <p>Dear Steve, <p> <p>Let's talk over this Yahoo! (YHOO) thing before you move ahead. It's a profoundly bad idea. </p></blockquote> <p>Also:<br><br> <ul> <li><a href="http://www.alleyinsider.com/2008/2/another_reason_msft_wont_raise_yhoo_offer_capital_research_1">Another Reason MSFT Won't Raise YHOO Offer: Capital Research</a></li></ul> <p>(Some possibly good news here. Especially since Capital Research is the largest institutional shareholder of both companies, and therefore has much more potentially at risk on the MSFT side)</p> <p><strong>Update #2: </strong></p> <p>More... um, "praise" for the deal:</p> <ul> <li><a href="http://www.iht.com/articles/2008/02/08/yourmoney/minvest09.php">Would buying Yahoo be a mistake for Microsoft?</a></li></ul> <p>Excerpt:<br><br> <blockquote> <p>He is especially frustrated by Gates's pursuit of his white whale when Microsoft has bigger fish to fry, like parrying the challenge from free operating systems like Linux; adapting to the migration of computing from the desktop to the cloud, and competing with <strong>Apple </strong>as it insinuates its hardware and software into people's living rooms, cars and telephones.... <p> <p>"Just now, when they've got momentum, they're going to crush it with this terrible deal," Mowrey said. "I think Microsoft is worth a lot less today than I thought it was worth yesterday."<br><br></p></blockquote> <ul> <li><a href="http://blog.wired.com/business/2008/02/shareholders-wa.html">Shareholders Want Microsoft-Yahoo Deal Done -- Pronto</a></li></ul> <p>Excerpt:</p> <blockquote> <p>"This is totally insane," says Shareholder Value Management analyst Jeff Embersits. "There's no way Yahoo's worth $44 billion. Period. [Yahoo Management] should fall on their knees, kiss the ground and go home and buy Porsches."</p></blockquote> <p>("Insane" seems to be popping up a lot when describing this deal.) MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com11tag:blogger.com,1999:blog-29195406.post-18495053888833611032008-02-06T11:50:00.001-08:002008-02-06T19:42:05.954-08:00Having Fun Yet?<p>I know I'm not. And if you think the market is getting it wrong, consider that MSFT was previously expected to make $2.09 per share in FY09. At a semi-reasonable 18X multiple, that would have generated a target price for the stock of around $37.62. Now, consider that some - notably Bernstein - think the YHOO deal could be .32 dilutive to that FY09 EPS target alone. In other words, it could drop to $1.77. If the multiple stayed the same, that would take the target down to $31.86. Which, not coincidentally, is virtually identical to what Canaccord provided today as they downgraded MSFT:</p> <blockquote> <p>Canaccord Adams downgraded MSFT as they believe shares will come under pressure if the company raises its bid for YHOO. Note that the firm upgraded YHOO to Buy from Hold. Target to $32.00 from $40.00. </p></blockquote> <p>But wait, it gets worse. See, with all the extra risk and uncertainty, there's no particular reason to think the market will still award an 18X multiple. I'll leave you to do the math if it dropped to say 16X, or - God forbid - 12X. Additionally, no one knows exactly how dilutive this deal will be. That's because it's half cash, half stock. Now in theory, as MSFT shares continue to decline, so too does the value of the offer. There's just one problem: even if YHOO management decide to accept the deal (and their options are pretty limited), they're very likely to insist that MSFT get it back up to <em>at least</em> the original $31/share level (some are saying $36-$40 might even be required). </p> <p>Since Ballmer appears to be intent on doing this deal (irrespective of the strong feedback shareholders whom he is meant to represent and work for are giving him), that would leave two choices: adjust the share multiplier higher (from its current .9509 of a MSFT share) - thereby resulting in even more shares being minted, further dilution for us, more downward pressure on future EPS, and a larger ongoing dividend obligation for the company - or change the 50:50 cash/stock balance to favor more cash which, since MSFT doesn't have it, would require taking on even more debt. And the more MSFT shareholders bail, the lower the stock goes, and the worse this non-virtuous failure loop becomes. Neat, huh?</p> <p>Then there's the fact that while Dumb and Dumber say this deal will be breakeven or better within two full fiscal years after the deal closes, they also said that was excluding various charges. In other words, don't count on EPS after charges - or final EPS - to be breakeven, even through FY10. Related, there is no way that YHOO on paper is going to be worth this price. So at some future point, MSFT is going to have to take a <strong>huge </strong>charge to write down the "goodwill" difference between what they paid, versus what YHOO was actually worth. I guesstimate that that charge will be at least $1/share, and it could easily be $2 or more depending on what the final price is, how the integration goes, etc.. Needless to say, a $1-2 charge in some future fiscal will have the effect of wiping out a large part of MSFT's overall earnings for that <em>entire </em>year.</p> <p>As I said in the last post, if you're a MSFT shareholder you should be hoping this deal gets kiboshed by either YHOO or regulators (however unlikely). Alternatively, you should hope that MSFT and YHOO come to some other accommodation. The best option there would be a standalone entity (either under the YHOO listing or a new one), into which both YHOO and MSFT contribute and MSFT shareholders get stock.</p> <p> </p> <p><strong>Update:</strong></p> <ul> <li><a href="http://www.schaeffersresearch.com/commentary/content/is+microsoft+desperately+seeking+yahoo/dailycontrarian.aspx?single=true&newsid=82541#82541" name="82541">Is Microsoft Desperately Seeking Yahoo?</a></li></ul> <blockquote> <p>Our case-in-point arrived today when Canaccord Adams <a href=" http://www.schaeffersresearch.com/commentary/content/yahoo!+and+microsoft+slapped+with+downgrades+as+buyout+offer+goes+unanswered/optionbytes.aspx?single=true&byteID=82523#82523"><b>cut Microsoft</a></b> from "buy" to "hold." Prior to today's activity, MSFT sported 14 "buy" or better ratings, compared to just 4 "holds." If this line of thinking begins to take hold on Wall Street, <strong>the shares could be looking at additional declines over the next few months</strong>. Additional fuel for the fire could come from the options pits, as the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.44 ranks below 72% of all those taken during the past year. While we can sit and debate the desperation and necessity of Microsoft's bid for weeks, it is investor sentiment that will ultimately vindicate or scuttle the company's shares. And right now, investors appear to be leaning heavily toward the "scuttle" end of the spectrum.</p></blockquote> MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com8tag:blogger.com,1999:blog-29195406.post-78268716129033802642008-02-05T08:40:00.001-08:002008-02-05T13:24:25.136-08:00"This is like a person who's completely lost his mind"<p>That's Joe Rosenberg's <a href="http://money.cnn.com/2008/02/04/news/companies/sloan_rosenberg.fortune/index.htm?postversion=2008020411">take</a> on MSFT's bid for YHOO (Rosenberg is Chief Equity Strategist for Lowe's Corp., a major Wall Street heavy hitter, and MSFT shareholder). Close, Joe. It's not <em>like</em> that, it <em>is</em> that. Rosenberg continues:</p> <blockquote> <p>It's absurd. They're not going to earn anything like a reasonable rate of return on their investment in Yahoo. It just doesn't make sense.</p> <p>This deal would do more harm to Microsoft shareholders than any of its competitors can do to it," Rosenberg said. "The company has lost sight of its principal focus, which is to produce value for shareholders."</p></blockquote> <p>Hmm...I believe I may have mentioned that last part a gazillion times or so over the past few years. </p> <p>Meanwhile, Ballmer and Liddell are busy <a href="http://microsoft.shareholder.com/webcast/MediaPresentation.asp?MediaID=29247&MediaUserID=0">talking up</a> the <em>synergies</em> of this deal. "Synergies", btw, are what you point to when you can't provide any specific, reasonable, measurable basis under which this deal makes financial sense, especially for MSFT shareholders (otoh, YHOO ones make out like bandits). </p> <p>As someone who has repeatedly called for MSFT to reduce its at times chronic overcapitalization and use that money to make smart, accretive acquisitions or return it to shareholders, I'm obviously not against them doing either per se. But if you're going to go the acquisition route, note the qualifiers: smart and accretive. Buying YHOO, imo, is neither. The company already agrees that it isn't the latter - at least not for <strong><a href="http://www.microsoft.com/msft/download/transcripts/fy08/steveb020408.doc">two full fiscal years</a></strong> following a successful purchase, and even then "excludes a lot of the accounting and purchase accounting of one-off costs".</p> <p>Ballmer is touting this deal as building on the successful momentum that Online has been able to generate. Huh? This deal is about <em>failure</em>, not momentum. Failure to spot the potential of this market space back in the late 90's. Failure to respond for YEARS while others staked out their now dominant positions. And failure over the past 4 years, since the company got "serious" about it, and spent $10B's directly (and likely at least that much again in R&D) in a failed attempt to catch up - or even generate a profit. Meanwhile, we have the failure of his previous massively expensive "emerging" bets to be anywhere near as attractive, or even to collectively payoff.</p> <p>Then there's the issue of <em>credibility.</em> Why should we believe anything coming from the team responsible for that track record of successive failure, who initially said catching up would be a matter of 6-12 months (how'd that work out?), or who recently justified $6B more of our money going to buy AQNT by assuring us that most of the big pieces were now in place for success? </p> <p>On the <em>timing </em>front, why now when MSFT was finally showing some organic business strength and attracting investors? In a heartbeat, perception of MSFT has gone from potential comeback kid to looking even more desperate and ineffective than ever versus GOOG. And on a more macro basis, why do this with the economy sliding into recession, with many forecasting an extended bear market, when GOOG is experiencing their first major revenue and earnings miss (finally beginning a process of unwinding their - and most related company's - higher multiples), and consumer-facing entities in particular are likely to be hard hit? Was YHOO secretly getting stronger and more valuable despite their recent grim earnings call, layoff announcements, and nosediving stock price? </p> <p>And what about <em>valuation</em>, a whopping 60% premium to market bid - some 66X earnings - for a company already trading at 2X the PE of MSFT and expected to actually <u>shrink</u> earnings next year despite operating in one of the industry's fastest growing segments? And given GOOG's miss the night before, YHOO was poised to drop significantly further on Friday. So then the real premium would have been more like 70%. </p> <p>Then there's the impact on <em>MSFT shareholders.</em> You know, the folks who actually <strong>own this company</strong>? With $40's looking possible (assuming a better market) on the back of some long-awaited business improvement and stock momentum, why should we want to see that destroyed via an acquisition that negatively impacts EPS for at least FY 09, and probably FY 10 as well? Not to mention adds tremendous additional risk, uncertainty, etc. in the interim? Similarly, why would we want to see the past $20B+ of buybacks using <em>our</em> cash instantly reversed, thereby diluting our ownership interest all over again? If this really is worth betting the farm - which is what Ballmer has effectively done - why not make it an all cash offer <u>like every other recent one</u>? The company now says it plans to take on debt for the first time anyway to finance this deal, so that historical excuse no longer flies. And Ballmer's answer yesterday - that he wanted to avoid financial risk (in addition to market and technology risk) - is hogwash. MSFT could easily make this an all cash offer, take on debt to fund the part not covered by cash, and then suspend the existing buybacks for the next couple of years to pay down the debt (or do just enough to neutralize normal ongoing dilution). There'd even be a beneficial tax writeoff. And YHOO has several equity interests that could be spun off in the interim to recoup at least another $10B (though you have to approach that carefully since the Chinese Alibaba stake in particular could be long term attractive). But instead, Ballmer et al plan to do what they always do: let Mikey - aka the average MSFT shareholder - eat it. Well, actually another orifice is involved...</p> <p>And what about the <em>business</em> <em>logic? </em>Do two GOOG roadkill equal one GOOG killer? If not, is distant #2 sufficient to justify this investment over any reasonable timeframe? Or is it reliant on some asinine 1-2 decade payback period like say Xbox, or maybe 2-3 like IPTV? Are current MSFT/YHOO customers going to say, <font color="#0000ff">"Wow, this disruption and uncertainly has me really excited. I'm not going to jump ship to GOOG and simply watch and wait. Instead, I'm going to stick with you though the next couple of years of integration nightmares, false starts and confusion"</font><font color="#000000">?</font> Are current GOOG customers going to say <font color="#0000ff">"I bet MSFT can integrate both entities and still do a better job for me than GOOG does currently. Sign me up</font>"? Are YHOO's predominantly Silicon Valley/BSD/Open Source/Open System orientated leadership and engineers going to sit back and say <font color="#0000ff">"Thank God MSFT came to our rescue. I've always admired them so much, and can hardly wait to start taking orders from Redmond and being told to switch to their proprietary technology, versus simply walking down the block to XYZ tech leader or startup"</font><font color="#000000">?</font> And who's going to do the major personnel cuts required to give this merger any chance of success? Ballmer, under whose leadership MSFT has turned into a top heavy, slow-moving, bloated bureaucracy? Is he suddenly going to reinvent himself as <a href="http://en.wikipedia.org/wiki/Albert_J._Dunlap">Al "Chainsaw" Dunlap</a> and lop off 5000 plus employees minimum? What about the obvious duplication across <a href="http://www.istartedsomething.com/20080202/microsoft-yahoo-big-mess-comparison/">almost every area</a>? How do you consolidate effectively when you're primarily after the user base? Some pundits are saying "they'll just pick technology winners" in each category. Excellent. So if I'm the guy who was using YHOO mail, and MSFT selects Live Hotmail (or whatever it's being called this particular week) instead, they figure I'll just happily accept it? Are they frigtarded? In almost all the major areas, users either consciously or unconsciously made a choice. If you attempt to remove that choice, there will be pushback and defections. The most likely beneficiary of that is GOOG. </p> <p>I also find myself getting <em>reflective</em>, and noting that with this move Ballmer will have blown through the <u>entire</u> cash pile that once reached ~$70B - and even taken on debt for the first time in MSFT history - while some competitors have invested far less (directly and via ongoing R&D) and yet now enjoy cash balances not far off MSFT's. What has been accomplished for all that cash and ongoing R&D investment? Is MSFT stronger? Are shareholders better off? Are customers happier? Are employees more motivated? Are the core products better thought of? What about the impact of this move on MSFT's existing businesses? You know, the ones they've done such a great job running to date that the banner "We uninstall Vista" is a differentiator for some PC shops, OS X continues to gain share, SQL Server just got delayed again, IE continues to lose dominance to Firefox, Nintendo continues to dominate and PS3 is threatening to finally outsell Xbox this past month (for the first time), the flash Zunes just got a quiet price drop (no doubt due to very poor sales), IPTV is still a non-factor to MSFT's overall results despite more than a decade and $10B's invested, etc. etc. etc. Are those areas going to get more or even less focus as MSFT goes further afield from its supposed core competence, vainly battling GOOG head-to-head? And what if the cash cows need to buy someone? With no cash left, does that mean MSFT goes further into debt? Or do they go without, while Online loses some more money for us?</p> <p>I've discussed the concerns. Could this biggest of reckless big bets pay off? Sure, there's an outside chance it could succeed given a long enough timeframe (read decades), uncharacteristically brilliant MSFT execution, <strong>and</strong> GOOG somehow fumbling. Is that reason enough to do it? No. Were it $20-$30B, my answer might be different. Everything has value assuming the right price. More importantly, I'm getting really tired of "promising" emerging opportunities being turned into financial sinkholes by leadership's "strategies", and then being forced to underwrite desperate fourth quarter Hail Mary passes with either <em>our</em> cash or via dilution of <em>our</em> ownership (while comically hearing that there's still plenty of time left on the clock), all for the promise of a future touchdown which never materializes. MSFT shareholders are constantly being asked to underwrite <u>massive</u> investments for some future payoff, only to be told (when that future arrives) that the payoff is delayed and still more investments are required. </p> <p>Here's how Ballmer sums up this deal:</p> <blockquote> <p>We have been losing money. Our plan here would be to not lose money in the future</p></blockquote> <p>Shareholders who have held MSFT stock since he took over as CEO in 2000, are faced with the same dilemma. Maybe that's why so many are selling on this news. The rest should be hoping that this deal gets kiboshed - either by YHOO or via regulators.</p> <p><strong></strong> </p> <p><strong>Update: </strong></p> <ul> <li><a href="http://collegeanalysts.com/?p=218">Microsoft: $250M Here, $6B There, $44 Billion…</a></li></ul> <p>Excerpt:</p> <blockquote> <p>A quick way to destroy my valuation target, not to mention the perception that you are a good company, is to go and throw your cash at a crappy acquisition target, paying 40x FCF in the process – and this is coming from someone who stuck up for Microsoft’s <a href="http://collegeanalysts.com/?p=177">aQuantive</a> and <a href="http://collegeanalysts.com/?p=179">Facebook</a> deals. Maybe this is all part of a brilliant plan on Microsoft’s part, but all I see is a massive expenditure of capital into a non-core industry where the company has no track record of success.</p></blockquote> <ul> <li><a href="http://www.alleyinsider.com/2008/02/handicapping-the-yhoomsft-scenarios.html">Handicapping the YHOO-MSFT Scenarios</a></li> <li><a href="http://www.alleyinsider.com/2008/02/why-google-wants-microsoftyahoo.html">Why Google Wants Microsoft-Yahoo</a></li></ul> MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com11tag:blogger.com,1999:blog-29195406.post-34772975599424295292008-01-24T10:05:00.001-08:002008-12-08T21:05:44.240-08:00Q2 FY08 Earnings<div><strong>Preview:</strong><br></div> <p>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 <a href="http://today.reuters.com/news/articlenews.aspx?type=topNews&storyid=2008-01-23T155637Z_01_N22344461_RTRUKOC_0_US-MARKETS-STOCKS.xml">notched the 20% decline that signals a bear market</a> - 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. </p> <p>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.</p> <p>As a reminder, consensus is as follows:</p> <ul> <li>Revenue: $15.95B<br> <li>EPS: .46</li></ul> <div>See more background here:</div> <ul><br> <li><a href="http://www.reuters.com/article/technologyNews/idUSN1832542920080122">Microsoft expected to post sharp profit rise</a></li></ul> <div>The <strong>most important figure</strong> - guidance for the year - was:</div> <ul><br> <li>Revenue: $58.8B-$59.7B<br> <li>EPS: $1.78-$1.81</li></ul> <div>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 <em>conviction</em> was short-lived - more like an <em>infatuation</em>. So let's see if [newer] analyst Sarah Friar can make it 2:2, following Rick Sherlund's disastrous 0:30 record previously. </div> <div><br></div> <div>I'll be back after earnings to update this post. Meanwhile, you can check out the recent Motley Fool <a href="http://www.fool.com/investing/value/2008/01/23/dueling-fools-microsoft-bull.aspx">bull</a> versus <a href="http://www.fool.com/investing/value/2008/01/23/microsoft-bear-argument.aspx">bear</a> debate on MSFT, or join me in scratching your head over <a href="http://www.windowsfordevices.com/news/NS2338697997.html">this</a> development.</div> <div><br><strong>Results:</strong></div> <div><br></div> <div><strong></strong></div> <div>Very strong. <a href="http://www.microsoft.com/msft/earnings/FY08/earn_rel_q2_08.mspx">Looks</a> to be a <strong>beat</strong> of consensus and whisper numbers on both the top and bottom lines, along with raised guidance for the full year:</div> <ul><br> <li>Revenue: $16.37B<br> <li>EPS: .50</li></ul> <div>Guidance for the year:</div> <ul><br> <li>Revenue: $59.9B-$60.5B<br> <li>EPS: $1.85-$1.88</li></ul><img id="BLOGGER_PHOTO_ID_5159171080358578290" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1p3eXgi7ur_RFd5RshzSHJQnN1HJ7iAeG3H8f3JFW1CqssiKfi-DtlU83-OosHSWDbMz4-BJQPDCR4fLEgsO8CXCGFei6YqztuvK4pWMm8kz91PJsEAD7VrAHi6qS4RV6bTWW/s400/Capture.JPG" border="0"><br> <div>Stock is up $1.50 to $34.75 currently in AH. Back with more commentary after the cc.</div> <div> </div> <div><strong>Conference Call and 10Q analysis:</strong></div> <div><strong></strong> </div> <ul> <li>15% growth overall (net of technology guarantee impact) <li>$4.1B in buybacks during the Q (leaving $8.7B remaining on the previously approved $36.2B) <li>Online advertising growth of 38% (26% excluding AQNT) <li>Online expenses grew even faster though <li>E&D managed its third ever quarterly profit and first back to back one (now just $5.4B to go before breakeven) <li>Cost of revenue dropped from 29% to 22% during the Q (yielding 21% vs 23% YOY half way through the fiscal) <li>Result: <strong>operating</strong> <strong>margins increased 4% to 40%</strong> <li>SharePoint grew 50% during the Q, as did Office Communication Server <li>Dynamics customer billings up 26% <li>427M Windows Live ids from 352M last year <li>22nd consecutive quarter of double-digit revenue growth for Server & Tools (very impressive) <li>Over 60% of sales from users and regions outside of the US (emerging markets up nearly 30%, non-US mature up 20%) <li>Unearned revenue down sequentially, but up YOY ($12.178B vs $11.861B) and $500M more than forecast <li>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) <li>Cash + short term investment down to $21.1B from $23.4B <li>Expect PC growth for the year to be 11-13% now (up 1% from previous) <li>Diluted shares outstanding decreased to 9.503B from 9.942B <li>Total stockholder's equity up $3.33B to $34.431B <li>Not immune to global economic factors, but haven't seen any negative spillover from a weakened US economy (yet) <li>Currently under audit by the IRS for tax years 2000-2006? (I must have missed this one previously)</li></ul> <div>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 <em>still</em> 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. </div> <div> </div> <div>Stock now up $1.59 to $34.84 in AH. We'll see what happens tomorrow in the regular session. </div> <div> </div> <div><strong>Update:</strong> </div> <div> </div> <div><a href="http://minimsft.blogspot.com/2008/01/microsoft-fy08q2-results.html">Mini</a> 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:</div> <div> </div> <ul> <li><a href="http://www.cnbc.com/id/22826950">Microsoft Knocks "Financial Cover" Off The Ball</a></li></ul> <p>On the less-positive but still worth reading side, Henry Blodget drills into the online numbers further:</p> <ul> <li><a href="http://www.alleyinsider.com/2008/01/microsofts-online-division-flat-growth-rate-still-burning-cash.html">Microsoft's Online Division: Flat Growth Rate, Still Burning Cash</a></li></ul> <p>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). </p> MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com12tag:blogger.com,1999:blog-29195406.post-15176688790757312482008-01-10T18:08:00.001-08:002008-01-12T09:52:53.811-08:00And then there was one...<p><strong>Jeff Raikes retires from MSFT.</strong></p> <p>My initial reaction - "Wow!". Didn't see this one coming. Gates, Ballmer, and Raikes have effectively been the top echelon of the company for as long as I can remember. With Gates having already announced his retirement this year, and now Raikes as well, that leaves just Ballmer from the original troika. </p> <p>The [external] choice for Raikes' replacement seems to have the right pedigree. There is also a fairly decent transition period - so hopefully no balls get dropped in the process. But Raikes did a solid job with Office and was widely seen as the leading candidate to succeed Ballmer. So combine that with some other recent high level departures, and I don't think the market is going to respond positively to the news tomorrow. </p> <p>Some coverage:</p> <ul> <li><a href="http://blog.seattlepi.nwsource.com/microsoft/archives/129236.asp?source=rss">Key Microsoft exec Jeff Raikes retiring (Updated)</a> <li><a href="http://www.microsoft-watch.com/content/corporate/raikes_steps_aside.html">Raikes Steps Aside</a> <li><a href="http://blog.seattletimes.nwsource.com/brierdudley/2008/01/raikes_retiring_now_who_will_b.html">Raikes retiring, now who will be the next CEO?</a> <li><a href="http://blogs.zdnet.com/microsoft/?p=1101">Juniper Networks exec to succeed Microsoft Business Division President Raikes</a> <li><a href="http://bink.nu/news/microsoft-announces-retirement-and-transition-plan-for-jeff-raikes-president-of-the-microsoft-business-division.aspx">Microsoft Announces Retirement and Transition Plan for Jeff Raikes, President of the Microsoft Business Division</a> <li><a href="http://www.cnbc.com/id/22598560">Microsoft Shakeup Equals a Raikes Take-Out</a> <li><a href="http://www.hunterstrat.com/news/2008/01/10/microsofts-raikes-retires-replaced-by-former-macromedia-ceo-stephen-elop/">Microsoft’s Raikes retires, replaced by former Macromedia CEO Stephen Elop</a></li></ul> <p><strong></strong> </p> <p><strong>Update:</strong> Made some additions/deletions.</p> <p><strong>Update #2 (1/11/08): </strong>Additional coverage that caught my eye:</p> <ul> <li><a href="http://www.news.com/8301-13860_3-9848432-56.html?tag=nefd.top">Raikes reflects on 26-year run at Microsoft</a> <li><a href="http://www.businessweek.com/technology/content/jan2008/tc20080110_184520.htm?chan=top+news_top+news+index_technology">Raikes to Follow Gates Out the Door</a> <li><a href="http://seattletimes.nwsource.com/html/microsoft/2004119046_raikes11.html">Office man to exit Microsoft</a><br><br> <blockquote> <p>"I don't have CEO envy," he said. "I like the kind of role that I play in the business. The key thing is Steve's a tremendous leader of our company and he's made it clear that he wants to be CEO here for many, many years — maybe 10 years or more — and I think that's great. I think that's the best thing for Microsoft."</p></blockquote> <p>(possibly telling comment here, assuming you read between the lines?) </p> <li><a href="http://www.newtelephony.com/news/81h118535325360.html">Analysts React to Elop’s Microsoft Defection</a> <li><a href="http://seattletimes.nwsource.com/html/microsoft/2004119042_elop11.html">Elop brings strong skills to take on competitors</a> <li><a href="http://www.bizjournals.com/sanjose/stories/2008/01/07/daily75.html">Juniper shares drop 15% after COO resigns to take Microsoft job</a> (apparently someone agrees with the article above, though there was a analyst downgrade there as well). <li><a href="http://www.marketwatch.com/news/story/microsoft-shuffles-management-mid-year-cleanse/story.aspx?guid=%7BABDF583B-964F-47B7-859B-B80FA878D328%7D">Microsoft shuffles management in mid-year cleanse</a> (Includes some analyst perspectives for and against the Elop choice) <li><a href="http://blogs.zdnet.com/microsoft/?p=1104">The Microsoft reorg week in review</a> (Foley details the recent senior level departures)</li></ul> <p>As someone who has been calling for leadership change for some time, I guess I'm overall happy to see it <em>possibly</em> occurring in earnest. But if it is (and the departure of Gates and Raikes make it unique regardless), it's almost inevitable that there will be those you didn't want to lose along the way - <strong>and ones that don't go who should</strong>. Let's hope both are minimized. It would also be nice if these announcements weren't landing so close to earnings and dribbling out piecemeal, with reports of still more departures to come. As this level, as reported, these things don't normally come as a surprise, at least for Ballmer. So make the announcements - all of them - and let employees and the market move on. That way it sounds like planned change, not musical chairs at the top or - worse - abandon ship. </p> MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com3tag:blogger.com,1999:blog-29195406.post-90802221686869083672008-01-09T14:06:00.001-08:002008-01-12T11:57:45.880-08:00Gates kills it at CES - literally<p>So Bill Gates had his final CES keynote as a full-time MSFT employee (and likely his last ever). Anyone who has attended a Gates presentation knows that they're long on repetition and short on excitement. In fact, they're normally real groaners. But apparently some were hoping for a miracle despite that well-established track record. And given that the consumer market is red-hot right now, and MSFT - being perpetually slow to respond - has finally even acknowledged that it needs to do a better job there (<a href="http://www.bloggingstocks.com/2007/12/28/microsoft-commits-300-million-to-consumer-advertising-blitz/">earmarking $300M more for advertising</a>), it would have been nice to see Gates and MSFT do more. But alas, it wasn't to be. In fact, the best part imo was the <a href="http://gizmodo.com/341472/this-video-makes-bill-gates-look-cooler-than-steve-jobs">video</a> - which shows a self-deprecating side of MSFT that I think few external watchers appreciate exists.</p> <p>Still, the media reviews are surprisingly scathing. Which suggests to me that others besides myself are tiring of MSFT constantly promising innovation but delivering precious little of it, and are no longer afraid to say so. Some examples:</p> <ul> <li><a href="http://bits.blogs.nytimes.com/2008/01/07/no-more-new-things-from-microsoft/?ref=technology">No More New Things From Microsoft</a></li></ul> <p>Excerpt:</p> <blockquote> <p>In an era when the vanguard of technology is creating smart devices for entertainment and communications, Bill Gates, the outgoing chairman of Microsoft, had little that was interesting or innovative to show off in his last annual keynote at CES in Las Vegas on Sunday.</p></blockquote> <ul> <li> <p><a href="http://www.winsupersite.com/reviews/ces08.asp">Consumer Electronics Show (CES) 2008 A SuperSite Special Report</a></p></li></ul> <p>Excerpt(s):</p> <blockquote> <p>But the biggest problem for CES isn't the competition, it's internal. And you only need to look as far as Microsoft to see what's wrong. Despite headlining the event, Microsoft didn't make a single major announcement last night, let alone acknowledge that some of its biggest announcements from last year--Windows Vista, new Media Center Extenders, or an IPTV-based Xbox 360--have yet to materialize or have any real positive impact on the market if they have. </p></blockquote> <blockquote> <p>And for crying out loud, start talking to Steve Jobs. That the most influential consumer electronics company in the world isn't at CES is a crime. <p> </p></blockquote> <p>And finally, the Pièce de résistance: </p> <ul> <li><a href="http://www.techcrunch.com/2008/01/07/the-truth-that-dare-not-speak-the-ces-keynote-sucked/">The Truth That Dare Not Speak: The CES Keynote Sucked</a></li></ul> <p>Excerpt:</p> <blockquote> <p>The big question is how, in 2008, have we come to a point that Microsoft is so bereft of new ideas and innovation that what was once the most important keynote speech of the year turned out to be a complete dog? It’s not for a lack of good people, there are many in Microsoft doing a great job, and there’s even some good technology and products being created (Silverlight and Windows Live Maps being two examples) and to those people I say don’t take this personally, it’s not personal, it’s just that if people don’t have anything interesting to say, they’re better off not getting on stage and making us yawn. I’ll be in San Francisco for the Steve Jobs keynote at Macworld next week and I doubt that I’ll be writing a similar post.</p></blockquote> <p>"How" indeed. Current leadership should really reflect on that - especially in light of the massive R&D spend relative to virtually everyone else (especially AAPL) - and make substantive changes. Will they? Of course not. They'll simply deny it's true - call it the <a href="http://www.informationweek.com/news/showArticle.jhtml?articleID=205210375&subSection=News">"Vista defense</a>".</p> <p>Reviewing the rest of the MSFT-related CES coverage, I found this article the most interesting:</p> <ul> <li><a href="http://www.news.com/Its-all-about-software%2C-says-Gates/2008-7353_3-6224924.html?tag=st.num">It's all about software, says Gates</a></li></ul> <p>Primarily because of this excerpt from Gates, which encapsulates most of the reasons I continued holding MSFT:</p> <blockquote> <p>Gates: Remember, it's all about software. So why are we talking about those companies? There are very few companies that understand software. The phone is becoming about software, the TV experience is becoming about software. Our bet goes back to the founding of the company--that software is going to be at the center (of things). It really is coming true. <p> <p>I think the core of who we are and what we do (is) believing in a platform. We're better positioned than anyone. Do we have to continue to work on our advertising scale and our search and some usability things in our music products? You bet. But that all comes off the core of being a company with the best research group, by far, of any software company, and a breadth of talent that everyone is envious of. </p></blockquote> <p><a href="http://gizmodo.com/tag/bill-gates/"></a> <p>What a shame that they've done such a poor job of executing to be the leader in realizing that vision. Instead, they lost focus, decided to be lazy, played defense, tried to solve every problem from a PC-centric perspective rather than a platform-agnostic software one, and vainly tried to hold back the internet. So now others - in particular AAPL, GOOG, and even Adobe - are realizing this original vision for them. Can this situation be turned around? With a lot of hard work and tough choices, I think so. But I don't see how you get there with a leadership team that begins from a position of near-total denial. Just ask an iPhone user who they think "understands software" better - AAPL, on their <em>first</em> attempt, or MSFT after <em>nearly a decade</em> of mobile involvement? Or maybe the problem isn't "understanding software", but more importantly understanding what people need to accomplish from it, and then maximizing the resulting "experience" for those paying the freight? Oh, and <a href="http://www.istartedsomething.com/20080109/ultimate-extras-inactive-reminder/">delivering on your commitments</a> doesn't hurt either. Just a thought.</p> <p>Off-topic - but related timing-wise (and therefore worth covering in this post) - is MSFT's decision to acquire Fast Search for a whopping $1.23B. I'm still scratching my head on this one. The market hated it - there's nothing like announcing a new $1.23B acquisition and immediately losing $5B in marketcap on the news. Apparently, the market initially saw it as [more] good money going after bad in the so far hopelessly losing battle against GOOG for consumer search/advertising share. That seems to be wrong, with the deal being more of a SharePoint/enterprise play. Thank god! Market reaction today suggests that maybe folks are now getting that. Still, when you the read history of Fast - suspended trading, accounting restatements, executive resignations, charges that a Director sold the company an external organization at an inflated price (pocketing the windfall), the heretofore dominant shareholder demanding removal of board members, Directors being sought for tax evasion by the Norwegian equivalent of the IRS, etc. - you really have to wonder "wtf was MSFT thinking?". Oh, and did I mention it's <strong>unprofitable</strong>? Doesn't MSFT already have too many of those? </p> <p>Now, maybe Fast has some killer technology and/or people that would be worth this otherwise ridiculous premium for such a troubled company. Even then, you have to question how come MSFT R&D, which has some of <em>the</em> industry acknowledged superstars in Search (and has been focused on it for several years now), wasn't light years ahead of some struggling player from Norway. Quite frankly, the whole thing smacks of a defensive move by MSFT to either play catch up (which, as above, shouldn't require going external), or to ensure that a failing company with some good technology didn't fall into the hands of ORCL, IBM or perhaps GOOG. Neither option seems like an especially great use of $1.2B of <em>our</em> cash, unless we see R&D come down by say an equivalent amount? Yeah, didn't think so. </p> <p>Some people do like the deal:</p> <ul> <li><a href="http://ap.google.com/article/ALeqM5gGtNUjDQUN1sc_MF_DqpVKRCBo_wD8U1VGA81">Microsoft Bids $1.2B for Norway's Fast</a></li></ul> <p>Excerpt:</p> <blockquote> <p>Forrester Research analyst Ken Poore called the buyout "a big deal." In an interview, Poore said Microsoft's search strategy has been weak, leaving the software maker trailing behind not only big players like Fast, but also Oracle and IBM, who have been investing in the technology in recent years. <p>"By going out and acquiring Fast, in my opinion, they've kind of leapfrogged" IBM and Oracle, Poore said.<br><br></p></blockquote> <ul> <li><a href="http://www.businessweek.com/technology/content/jan2008/tc2008018_832182.htm?chan=top+news_top+news+index_technology">Microsoft Buys Fast, Plays Catch-Up</a></li></ul> <p>Excerpt:</p> <blockquote> <p>The acquisition will give Microsoft an immediate strong presence in the market for corporate search software thanks to Fast's high-end roster of clients, including Merrill Lynch (<a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=ML">ML</a>), Disney (<a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=DIS">DIS</a>), Best Buy, Pfizer (<a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=PFE">PFE</a>), and Dell (<a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=DELL">DELL</a>). The Norwegian company's chief rivals in the estimated $4.8 billion business include Google (<a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=GOOG">GOOG</a>), IBM (<a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=IBM">IBM</a>), Britain's <a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?capId=123217">Autonomy</a>, Oracle (<a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=ORCL">ORCL</a>), and SAP (<a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=SAP">SAP</a>). Fast was on track to book $200 million in 2008 sales—about 20% higher than in 2007—and Microsoft's direct-sales and reseller network can expand that, UBS (<a href="http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=UBS">UBS</a>) analyst Heather Bellini wrote in a note to clients. </p></blockquote> <p>The latter includes MSFT perma-bull Brendan Barnicle, a vice-president and senior research analyst at Pacific Crest Securities:<br><br> <blockquote> <p>"Buying Fast will cost Microsoft less than three weeks' worth of free cash flow, and could provide better returns on the company's $21.6 billion cash pile than stock buybacks and dividends...Microsoft has tried everything in the world with its cash," Barnicle says, "and nothing has really worked for the stock." </p></blockquote> <p>Um, Brendan, is that meant to encourage shareholders given that the company isn't profitable? Sorta like "buying the shares of a losing company is a better investment that buying shares of MSFT"? Er, okay. Also, isn't that because the <em>one thing</em> they <em>haven't done</em> with our cash is use it to make <u>smart</u>, <u>accretive</u> acquisitions in areas that they <u>actually know something about and can execute best-in-class in?</u></p> <p>Also <a href="http://blog.seattlepi.nwsource.com/microsoft/archives/129029.asp?source=rss">pumping the deal</a> was top-rated Goldman Analyst Sara Friar:</p> <blockquote>The acquisition of FAST bolsters Microsoft's positioning in the enterprise search market. We view this acquisition as a necessary next step to help Microsoft shore up its defenses against Google in the enterprise. Microsoft's strength is that it owns the entire back-end infrastructure and hence data in the enterprise, which may be more difficult for Google to access. We also believe that this acquisition highlights an increased focus on inorganic growth.</blockquote> <p>Hmm.."shore up its defenses" in the enterprise? Isn't that what MSFT's massive annual R&D spend is meant to do - at a minimum? And an "increased focus on inorganic growth"? So basically Ballmer is throwing in the towel on his largely failed "big bets" strategy and adopting ORCL's approach instead? The same one he initially denigrated, but which has subsequently shown far better returns than his own? Well, if true, that might actually be a good thing - though Fast seems an unlikely candidate for achieving success on that tact. Finally, Sara forgot to mention that Goldman <a href="http://www.informationweek.com/management/showArticle.jhtml?articleID=205600439&cid=RSSfeed_TechWeb">acted as advisor to MSFT in the deal</a>. But I'm sure that didn't influence her coverage <wink></p> <p>Bottom line, this was likely Gates' last keynote at CES - and that's a good thing. Listening to Bill reminds me of some old-school news anchors or politicians. They're smart, capable, etc. but just seem out-of-step and staid. Sorta like recent interviews I watched with former NBC anchor Tom Brokaw and current CNN anchor Anderson Cooper. Cooper came across as hip, fresh, and real; Brokaw did not. The company needs a new chief spokesperson. This time, one that's capable of getting people fired up about the company's new and exciting offerings (assuming they can fix what's wrong there and deliver those). And please don't tell me that's Robbie Bach, whose CES presentation sounded more like he was doing his performance review and trying to justify his job. It also isn't Ozzie, sadly. So who? And wrt the Fast acquisition, let's just say that for shareholders at least, that's yet another questionable "show me" investment versus any kind of obvious home run.</p> <p><strong></strong> </p> <p><strong>Update:</strong> Under the heading "be careful what you wish for". Okay, so maybe there's a limit to how "real" you want your main spokesperson to be after all:</p> <h5></h5> <p><a href="http://www.sitemeter.com/stats.asp?site=sm7gizmodous"></a> <p><a href="http://gizmodo.com/tag/bill-gates/"></a> <ul> <li><a href="http://gizmodo.com/342920/holy-crap-did-bill-gates-just-say-windows-sucks">Holy Crap: Did Bill Gates Just Say Windows Sucks?</a></li></ul> <p>The discussion <a href="http://www.engadget.com/2008/01/07/bill-gates-the-exit-interview/">here</a> provides some more background on his thoughts wrt Vista, mistakes made, and what I hope he meant. </p> MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com15tag:blogger.com,1999:blog-29195406.post-63431353683804007652007-12-22T10:51:00.001-08:002008-12-08T21:05:44.407-08:00Will this dog ever hunt again?<div>I haven't published anything for a couple of months, which led one commenter to wonder if I'd been "shut down". That sounded kinda ominous - sorta like black helicopters swooping down from Redmond HQ. Alas, nothing quite so dramatic. I simply haven't seen much that I thought was worthy of comment.<br><br></div> <p>Not that I didn't try. In November, for example, I wrote up the annual shareholder meeting. I titled it "The Annual Transylvanian Convention" because it felt more like I was listening to management dancing the Time Warp at the <a href="http://en.wikipedia.org/wiki/The_Rocky_Horror_Picture_Show">Rocky Horror Picture Show</a>. There was company leadership delivering their well-rehearsed but increasingly tired old lines, and a cast of shareholders from the lunatic fringe, including head psycho <a href="http://en.wikipedia.org/wiki/Ken_Hutcherson">Ken Hutcherson</a>. Had I been in attendance - versus listening to the webcast - I would definitely have sailed a piece of burnt toast in the good Reverend's general direction. Then again, my focus would have been on asking Steve:</p> <blockquote> <p><em>A dollar invested the day you took over as CEO in 2000 in any of your main peers/competitors like IBM, ORCL, HPQ, SAP, and AAPL, or simply placed under a mattress, would be worth far more today that the same money invested in MSFT which is down almost 40%. Additionally, despite all the money the company has made during that time, shareholder equity has actually declined, in large part to accomplish even that anemic level of stock performance. Given that track record, why do you think shareholders should continue to support your management team, this BOD, and continue holding the stock moving forward?</em></p></blockquote> <p>I also started putting virtual pen to paper on the various "How best to structure a MSFT/YHOO deal" articles that appeared that month. But then decided that talking about "how best" to structure a MSFT/YHOO merger is really just an oxymoron. Partner? Yes. Merger? Expensive for MSFT shareholders and highly unlikely to succeed.</p> <p>Anyway, I've continued to follow events and the stock. And it's not like there haven't been a ton of developments on both. WRT the former, I guess I've been struggling to decide whether the recent impressive flood of product releases (updates, SPs, betas, etc.) - gives me hope that MSFT is <em>finally</em> getting its act together, or whether the massively bungled ongoing clusterfuck that is Vista's launch, the continued market share hemorrhaging to Google, the <a href="http://www.ipodobserver.com/story/34091">embarrassing success</a> of the iPhone (<a href="http://gizmodo.com/gadgets/what.s-wrong-with-windows-mobile/whats-wrong-with-windows-mobile-and-how-wm7-and-wm8-are-going-to-fix-it-333536.php">which appears to have MSFT's mobile group in full damage-control mode and doing public mea culpas about what they need to fix in their UI</a>), etc., convinces me that this company is in a fight for its very survival - and losing. Indeed, that's why the title of this post is a question mark versus a statement one way or the other.</p> <p>What does it say, for example, when you have a disconnect this big?:</p> <blockquote> <p><em><b>"</b>When Longhorn and the Longhorn wave of products ships, they will be great products. I have absolutely no doubt about that."</em></p> <p align="right"><a href="http://www.activewin.com/interviews/microsoft/36.shtml">Steve Ballmer</a></p></blockquote> <blockquote> <p><em>"#1. No Wow, No How: Windows Vista</em></p> <p><em>Five years in the making and this is the best Microsoft could do?"<br></em></p></blockquote> <p align="right">PC World, <a href="http://www.pcworld.com/article/id,140583-page,5-c,techindustrytrends/article.html">The 15 Biggest Tech Disappointments of 2007</a><br><br> <p>In fairness, Leopard and iPhone also made PC World's list. But numerous other publications have said effectively the <a href="http://crave.cnet.co.uk/gadgets/0,39029552,49293700-10,00.htm">same thing</a> about Vista. More importantly, sales results - or lack thereof - prove it. This release has not resulted in the "2X adoption rate of XP" that management claimed it would. Indeed, it's lagging XP on an apples-to-apples compare. Now that's still a huge number in absolute terms, but it's a significant failure vs even company-provided expectations (far less market ones after five years in the making). Meanwhile Leopard, despite many widely-reported bugs, has been a <a href="http://www.dailytech.com/A+Hungry+Leopard+Sets+Another+Record/article10092.htm">blowout success</a> for AAPL. <p>Quite frankly, if you compare the progression of OS X over the past decade with that of Windows, the feature set of both current offerings, then factor in that Apple has spent a fraction of what MSFT has on development and marketing, it is impossible to overstate the magnitude of how badly Microsoft has screwed up here. <strong>Effectively, MSFT has ceded its position as <em>the</em> clear leader in personal computer operating systems</strong> (btw,<strong> </strong>I'm obviously talking technology not marketshare - at least for now)<strong>. </strong>That's the <strong>core</strong> of what this company does and is <em>meant</em> to be good at. In fact, if (when?) Microsoft eventually implodes and the definitive book is written to answer the question "What went wrong?", the Vista/Longhorn drama will no doubt make the top 5 list (FWIW, imo, #1 would be the sense of entitlement that permeated the company in the late 90's and caused them to think they were owed a market and could basically sit back and coast. #2 is the anti-trust loss and resulting fallout which continues to this day - itself caused by the arrogance from #1. #3 being the stupid decision to try and hold back the web vs embrace and lead it, which also led to #2. And #4 being a seemingly endless series of ill-conceived, poorly-executed, big bet "investments" that have collectively been a dismal failure).<br><br> <p>For the record, I use Vista as my primary OS and have for some time. I would never go back to XP. As I've said before, it's not that Vista is bad, it's just not nearly good enough - and the <a href="http://blogs.zdnet.com/Ratcliffe/?p=249">$500M marketing campaign</a> has been <u>abysmal</u>. First, you have to seriously question the judgement that said let's message this product as "the wow starts now" knowing full well (as is now clear) that there was very little wow, and that major driver and application compatibility issues existed. Someone high up was either seriously deluded, or (more likely) decided "wtf, let's try and bullshit our way to success". Has this person (or group of people) been fired? I'm guessing "no" (and yes, I know Allchin eventually got the golden parachute and divisional leadership has now changed - I don't think that covers it). Second, day-after-day we are bombarded with AAPL TV ads bashing Vista (many demonstrably misleading or false), endless media pieces containing factual inaccuracies along with calling the OS a downgrade from XP (absolutely not imo), buggy (not in my experience), bloated (okay, that's true), etc. And what do we get from Microsoft?</p> <p><font color="#0000ff">[Cue sound of crickets]</font>.<br><br>That's right, mostly silence. For example, I have yet to see even <em>one</em> Vista ad on TV - maybe I'm watching the wrong shows. But compare that to at least one <em>each night </em>for Apple. Is there anyone in Redmond that's actually proud of this release? Willing to stand up and make the case? Smart enough to understand that perception *is* important and that you're losing that battle <u>big time</u>? Anyone with even a glint of the old pit bull that would have come out with teeth bared and ripped into the endless stream of negativity with counter points, explanations, or at least corrected the more glaring inaccuracies? Well, there's at least <a href="http://uksbsguy.com/blogs/doverton/archive/2007/11/29/is-vista-really-that-bad-or-do-we-have-rose-tinted-glasses-how-well-was-windows-xp-accepted-in-the-early-years.aspx">one</a>, but he's a pretty lonely voice and doing it personally versus officially. Instead, the company seems resigned to hyping Minwin as something "new", and using the promise of a more-streamlined future version of Windows (7) - along with an improved version of XP via a new service pack - to prevent more folks from jumping ship to OS X or Linux. Even Vista's SP1, which I'm sure many people have been working on tirelessly, is being downplayed at <em>every</em> opportunity by the company. It's like the company has thrown in the towel on voluntary upgrades and is content to just wait for hardware refreshes and/or the obsolescence of previous versions to force the change. That'll probably work too, but what's the impact for the next cycle? How many times can the company afford less-than-stellar releases of its flagship products? Or does the company think people should buy Vista as a transitional OS on the way to 64-bit because that's what makes sense <em>for</em> <em>MSFT</em>? If so, good luck with that approach. Netting it out, while the product isn't nearly as good at it should have been, it's <em>much</em> better than current perception. Blame for the latter rests squarely with <u>MSFT</u> who is failing to tell the story effectively. </p> <p>I'm already running long, so I won't bother going into detail about the mess Microsoft has made of Search/Advertising and the $B's of shareholder cash blown. Management said to look for a turn by year-end and I was optimistic they could get there. That turn never came. Blodget sums it up nicely <a href="http://www.alleyinsider.com/2007/12/google-going-to-7080-search-share-crumbs-for-yhoo.html">here</a>. Excerpt: </p> <blockquote> <p><em>Per today's numbers, Microsoft has a pathetic 7% share of the US market, down 3 points year over year. Given the hundreds of millions (billions?) Microsoft has spent on search, it is impossible to overstate how awful this is. Based on past trends, it's only going to get worse.<br><br>Despite all the advantages one could ever ask for (browser monopoly, unlimited money and R&D resources, global platform, etc) Microsoft is going nowhere but down in this market. Anyone who says differently is hallucinating.</em></p></blockquote> <p>Abstracting from all this, the real question I'm struggling with is how does a company who leads the industry in R&D spending and has <a href="http://www.news.com/8301-10784_3-9836499-7.html">this</a> latent technology arsenal, manage to trail most peers on coming to market with anything exciting? I saw a quote recently that struck me as accurate - especially in the increasingly important consumer space: </p> <blockquote> <p><em>Any sufficiently advanced technology is indistinguishable from magic.</em></p></blockquote> <p align="right">Sir Arthur C. Clarke</p> <p align="left">IMO, this is why the iPhone is succeeding. Yes, you can make a case that much of it is derivative, but the way it's put together is innovative and has that "magic" quality for users. That's why customers wait in line. That's why demand is huge (reportedly as high as 25% of smartphone sales in the US this past Q). That's why people stop to gawk when someone pulls one out in a crowd. Where's MSFT's magic? Do they even strive for that, or are they content to simply keep promising "wow" and not delivering it? For example, check out this mixed <a href="http://www.infoworld.com/article/07/12/19/51TC-microsoft-hyperv-preview_1.html">early feedback</a> on Hyper-V - a critically strategic product in yet another core technical area that MSFT ceded to someone else (along with marketshare leadership in this case). I realize it's beta, but why deliver it "early" (well, if you forget that the whole thing was already delayed previously) if it's this average and buggy? The public reason is to give folks a chance to try it out, blah, blah blah. I'm sure that's part of it. But you'd have to be an idiot if you think MSFT isn't doing this to try and freeze the market and check VMware's growth - a tactic that used to work for the company back in the 90's, but hasn't really worked since (not that that stops them from repeatedly trying it). And why is MSFT doing that? Well, because VMware didn't sit on their ass this past decade, and instead built a great product that solves a real customer need. As a result, they've been rewarded with a fantastic, profitable, fast-growing businesses that MSFT now covets, and which also poses a potential threat to its cash cows. </p> <p align="left">Moving on, I see that Mary Jo Foley's predictions for 2008 include a <a href="http://content.zdnet.com/2346-12558_22-180846-5.html">Zune phone</a>. Is there anyone who thinks that the management team who failed on the original Zune, is failing on the current Zune (at least the flash models; Zune 80 is still TBD since MSFT can't seem to ship it in quantity), and hasn't made even a decent deposit on the $20B of shareholder cash pumped in and $6B lost on Xbox (despite being at it for most of this decade), is capable of delivering a "magical" phone? Let me spare you the suspense. If MSFT delivers a phone, it will introduce one or two nice ideas that it fails to even moderately exploit. The UI will be too confusing. It will be too big, too slow, too buggy, suffer from insufficient battery life, and will be poorly marketed. Version 2 - at least a year later - will be better, but still buggy and largely me-too or worse. Version 3 - at least three years after first launch - will finally start to be competitive. Sadly, by that point, MSFT will have burned through minimum $500M and still be losing money, whereas the market leader(s) will be profitable (probably from day one), and will have built a dominant position, leaving MSFT to struggle for 10-20% marketshare table scraps. We see this play out again and again and again and again. Indeed, the only "genius" H&E management in particular have shown, is in maintaining their aura of being MSFT's future - and retaining their jobs - in the face of what can only be described as abject failure on behalf of shareholders. </p> <p align="left">Sadly, I really don't see any of this changing until there is a change at the top that brings with it an entirely different emphasis on innovation, the minimum bar to ship, and places a far greater value on preserving/enhancing the MSFT brand name rather than continuously squandering/diminishing it by repeatedly shipping things that are half-baked and/or sub-par.</p> <p align="left">Moving on to the stock, again it's a mixed bag. After finally breaking out of the multi-year trading range, we promptly gave back much of it. This caused at least one publication to ask "<a href="http://blogs.barrons.com/techtraderdaily/2007/11/23/whats-wrong-with-msft/">What's wrong with MSFT</a>". Luckily, I bought puts because I'd seen this movie before. We've now rebounded somewhat, and should end the year 5-10% better than the NAS. That's a nice recovery from the situation that prevailed for most of the year, and it's easy to get caught up in the euphoria of seeing mid $30's again. However, the fact is that MSFT has still badly underperformed most of its <em>own</em> self-selected peers over the past 5 years (only DELL has done worse):</p><img id="BLOGGER_PHOTO_ID_5146873240591943954" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4054lsg1najGrMq3gwmzD4yeI3HM7LRV3m6_gjUDnm9p1XjA_j7HE1pAfnP3rOKEW-4VoNdz5o9YgeMhK2iE55ao0LQ_PqX1olfwTcymcOJs3p6kqUpLBCO76EFBWtbwixLoC/s400/Capture.JPG" border="0"><br> <p align="left">And don't even bother adding real competitors and current momentum favorites like AAPL or GOOG, who again left MSFT in the dust on the year despite massively outperforming it already over the past five. </p> <p align="left">Equally concerning, is the fact that MSFT is one of the few companies on this list who have actually <u>shed</u> shareholder equity over that time versus grown it. Yes, the massively stupid one-time dividend (and all subsequent dividends) is part of that. Ditto the ongoing buybacks. But a big part is the unbelievably expensive "emerging bets" that have collectively failed to pay off. Add it up, and you have the <em></em><a href="http://blackfriarsinc.com/blog/2007/11/incredible-shrinking-microsoft">current situation</a> where shareholder equity continues to decline and a stock that has badly underperformed over the past five years. Meanwhile, outside of Ballmer and Gates, you have one of the highest paid leadership teams in the industry. Now, does that make any sense whatsoever? I'm talking from a shareholder's perspective, btw - clearly management is making out nicely despite their demonstrated failure to create shareholder value.</p> <p align="left">Bottom line on the stock, while it may be <a href="http://collegeanalysts.com/?p=119">less overvalued than some on say a DCF basis</a>, unless the company can generate some surprises on earnings and/or execution, it's likely to continue being an industry laggard and struggling to keep up with the market (although it's done better on the latter these past two years). Which is why you have comical stuff like CFO Liddell <a href="http://seattlepi.nwsource.com/business/339221_software12.html">quoted</a> recently saying (about the share price) that:</p> <blockquote> <p><em>I never make a judgment about whether it's too high or too low.</em></p></blockquote> <p>WTF? The guy principally tasked with doing $B's every quarter in buybacks - using <em>our</em> cash - isn't making a judgement about whether the stock price it too high or too low? So are you admitting to being incompetent, Chris, or are you "just" lying? It's the latter, of course. What Liddell really means is that management want to continue abdicating responsibility for the stock - unless of course it happens to go up (in which case they'll be the first to take credit - as they comically did when the stock finally "outperformed" last fiscal, following the crash to 3-year lows the year previous caused by their bungled "spending surprise"). He's also telling you that they plan on buying it back regardless of inherent value because...well, because they're too clueless to redeploy the cash more effectively and need to keep mitigating the dilution caused by their outsized pay packages. And since we shareholders keep letting them, why not?</p> <p>All of which reminds me of a <a href="http://seattletimes.nwsource.com/html/microsoft/2004012655_microsoft14.html">statement</a> made by a shareholder at the November meeting. Excerpt:</p> <blockquote> <p><em>But Tuesday's shareholders meeting didn't have the spark longtime investors remember from the good old days.<br></em> <p><em><br></em> <p><em>"When I used to go to Microsoft meetings, it was like, 'Thank you, you made me a millionaire,' " said James Arnstein of Vancouver, Wash., who was attending his first shareholders meeting since 2000. "The room was just so powerful because you created so much wealth for the shareholders."</em></p></blockquote> <p>That's because back then this dog could hunt. Now, it mostly likes to eat, lie on the porch, and sleep a lot, while shareholders make corporate officers millionaires and underwrite the cost via stock declines and underperformance due in large part to the failure of said management's investment choices, execution, and ability to instill confidence on Wall Street. <p>So what does the future hold? Can this dog learn to hunt again? That's likely the minimum requirement for this stock to ever provide outsized returns. It may even be required for the company just to survive. Or will MSFT continue its march into irrelevance, struggling to even be an "IBM" ten years from now? </p> <p>IMO, unsurprisingly, that's going to come down to leadership. Can Ballmer pull it off? I'm doubtful - he's had eight years so far and we've seen the results. Who does that leave? Raikes? He'd seemingly get the nod if Ballmer and Gates have a say, and it's likely the main reason he's stuck around. Is he up to the task? Again, I doubt it. He's simply too invested in what used to work but no longer does. Who does that leave? One of the hip earring-adorned geniuses from H&E that can't figure out basic ROI? Pass, thanks. One of the former CEO's from companies MSFT has acquired like AQNT? That strikes me as the best choice - or of course an outsider. The problem? I don't seen any signs that Ballmer is planning on giving up his chair. </p> <p>The bottom line is that I really don't know how it will turn out. Even though this post (on re-reading it) comes off clearly in the negative camp, in reality I think the odds are about equal for it to go either way. What do you think? See any reasons to be more optimistic? Pessimistic? I do know one thing: If management plans to go another five years enriching themselves and letting the cost of their failed strategies and execution be underwritten by shareholders, then this holder won't be along for another ride. </p> <p> </p> <p><strong>Update</strong>: Further to the discussion of putting out stuff that's half-baked:</p> <ul> <li><a href="http://community.winsupersite.com/blogs/paul/archive/2007/12/22/serious-windows-home-server-concerns.aspx">Serious Windows Home Server concerns</a></li></ul> <p>Some of the products causing problems?:</p> <p>Windows Vista Photo Gallery<br>Windows Live Photo Gallery<br>Microsoft Office OneNote 2007<br>Microsoft Office OneNote 2003<br>Microsoft Office Outlook 2007<br>Microsoft Money 2007<br>SyncToy 2.0 Beta <p>But hey, why would MSFT have thoroughly tested at least those, right?</p> <p><strong>Update #2</strong>: And to give the "pro" side equal billing (although it contains some comments that make even my criticisms look tame):</p> <ul> <li><a href="http://www.eweek.com/article2/0,1759,2238710,00.asp">Analysts Predict a Better 2008 for Microsoft</a><br></li></ul> <p><strong>Update #3</strong>: More related articles:</p> <ul> <li><a href="http://www.microsoft-watch.com/content/vista/defending_windows_vista.html">Defending Windows Vista</a> <li><a href="http://blog.seattlepi.nwsource.com/microsoft/archives/128168.asp?source=rss">Windows Vista gets pounded in year-end recaps</a> <li><a href="http://blogs.zdnet.com/microsoft/?p=1066">Microsoft’s $300 million ‘consumer product blitz’ inches closer</a> (Go figure. Excerpt: "Microsoft has nowhere to go but up with any kind of consumer advertising campaign". Well <em>that's</em> true). <li><a href="http://blogs.moneycentral.msn.com/topstocks/archive/2007/12/19/tech-train-wrecks-in-2007.aspx">Tech train wrecks in 2007</a> <li><a href="http://www.alleyinsider.com/2007/12/what-apple-bulls-are-missing-mac-cleared-for-takeoff.html">Christmas Present For Apple Bulls: Mac Cleared for Takeoff</a><b></b> <li><a href="http://www.forbes.com/home/technology/2007/12/20/apple-army-hackers-tech-security-cx_ag_1221army.html">Apples For The Army</a> <li><a href="http://www.usatoday.com/money/industries/technology/2007-12-26-apple-200_N.htm">Apple trades at $200 for first time</a> <li><a href="http://collegeanalysts.com/?p=182">Microsoft (MSFT): Skip the Vista Upgrade, Buy the Stock?</a> (btw, it's a tease - the answer is only if you want market performance or slightly better over the next 2 years). <li><a href="http://www.microsoft-watch.com/content/corporate/2008_defundefinedive_unsolicited_advice_for_microsoft.html">2008: Definitive, Unsolicited Advice for Microsoft</a></li></ul> <p><font color="#666666"></font></p> MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com12tag:blogger.com,1999:blog-29195406.post-15613777476269024612007-10-31T15:34:00.001-07:002008-12-08T21:05:44.539-08:00What a difference a week makes<div>A week ago, MSFT could do no right. Now, following the recent strong quarterlies, MSFT can seemingly do no wrong - or at least the market is prepared to overlook it. Vista still <a href="http://www.brandweek.com/bw/news/recent_display.jsp?vnu_content_id=1003664178">not tracking well</a> and actually <a href="http://www.macnn.com/articles/07/10/26/vista.sales.rate.slowing/">slowing</a>? Yawn. Just give it more time. Higher recognition rates dramatically helped client performance last quarter? Sure, but they'll find some more revenue later. Currency gain last Q equal to much of the percentage increase in revenue and earnings guidance for the year? Well duh, but someone might as well benefit from the ever-declining <a href="http://www.bloomberg.com/apps/news?pid=20601080&sid=a3E1HAyoKyIs&refer=asia">US peso</a>. Insiders <a href="http://www.nasdaq.com/asp/quotes_sec.asp?mode=&kind=&symbol=msft&symbol=&symbol=&symbol=&symbol=&symbol=&symbol=&symbol=&symbol=&symbol=&FormType=&mkttype=&pathname=&page=filings&selected=MSFT">selling with abandon</a> again, including ex-President and current Director Shirley who unloaded 500K shares or 25% of his entire position? Hey, a guy's gotta live. Plus, $17.5M doesn't buy what it once did. Apple sells <a href="http://www.alleyinsider.com/2007/10/apples-blockbuster-weekend-10-percent-of-macs-got-leopard.html">2M copies of Leopard</a> in the first weekend of availability (~10% of all capable machines)? Not to worry, Mac fans are just zealots. US Antitrust oversight of MSFT <a href="http://www.hunterstrat.com/news/2007/10/19/states-ask-for-continued-us-antitrust-oversight-of-microsoft/">might get extended another 5 years</a>? Oh well, legal needed something to do anyway now that lawsuits are decreasing.<br><br> <p>Even competitors are helping out with some uncharacteristic missteps; AAPL having some fairly significant - not to mention embarrassing - <a href="http://www.windows-now.com/blogs/robert/archive/2007/10/30/doncha-love-that-new-os-smell.aspx">teething problems</a> with Leopard; GOOG suffering <a href="http://seekingalpha.com/article/51132-a-google-brain-drain">brain-drain</a> and flailing a bit trying to check the growth and popularity of Facebook; Linux growth beginning to <a href="http://www.eweek.com/article2/0,1759,2207368,00.asp">slow</a> as the initial migration from proprietary UNIX starts to abate. Not to be left out, mainstream media is jumping on board too. For example, Joe Wilcox writing about the AAPL/MSFT <a href="http://www.microsoft-watch.com/content/operating_systems/the_great_double_standard.html">double standard</a> (funny stuff, especially since as a supposedly neutral [at least] MSFT observer he has been among the worst offenders) and ZDNet asking "<a href="http://blogs.zdnet.com/BTL/?p=6773">Can't we give MSFT some props?</a>". [BTW, have no fear. Yours truly isn't about to drink the Kool-Aid completely just yet].</p> <p>And with that, the stock continues to act more like a Chinese IPO. Okay... maybe I'm pushing it a bit there. But it has made a pretty good dent in the past 5 years of underperformance (now ahead of the NAS over 1 year, still behind over 3). I tell you, if it wasn't for the fact that the sun keeps rising each morning and setting each evening, I'd question whether I was dreaming. If MSFT now starts hitting ship dates consistently, I'll be forced to conclude that I've finally wigged out or entered the Twilight Zone.</p> <p>Of course, the (more likely) reality is that MSFT wasn't as bad as it seemed a week ago, nor as good as it seems now. The problems that were there before are still there, and much of this [stock] move is simply catch up. For example, even with the recent jump, MSFT still <a href="http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=PriceRatios&Symbol=MSFT">trails the industry average P/E</a>. Plus, the shattering of the 5 year trading range likely attracted some short-term technical buyers - and they'll unwind their trades and take their profits as quickly as they put them on. Still, the high volume that has characterized this move suggests that institutions are doing some serious buying as well. And they don't normally do that unless they expect several good quarters ahead. That said, a decent pullback would seem like a foregone conclusion and even healthy, whereas a continued run without consolidation is risky long term. Today, we didn't end on the high while the Nasdaq did. So perhaps that correction is coming. We'll see (although it's up in AH). </p> <p>Getting back to the company, I hope the recent stock run is viewed in context internally, not used to excuse continued inaction or otherwise ignore the many areas that still need attention. In particular, I hope someone sees the wisdom inherent in this statement, <a href="http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/30/ccyang130.xml">made recently</a> by YHOO's Jerry Yang [bolding mine]:</p> <blockquote> <p>In an acknowledgement of the famous "peanut butter" memo, in which one Yahoo executive accused the company of spreading itself too thinly, Yang admitted: "<strong>We have taken this idea that we can do two or three things well and not a thousand little things. It probably means we won't focus on a bunch of other stuff. We are in that process of identifying what makes it and what doesn't make it</strong>."</p></blockquote> <p>But for now, like most shareholders, I'm enjoying the ride and hoping it's the beginning of a more positive <em>process</em> versus just an <em>event</em>.</p> <p>FWIW: Some other articles I've been reading:</p> <ul> <li><a href="http://technology.timesonline.co.uk/tol/news/tech_and_web/personal_tech/article2765597.ece">Microsoft looks to a world beyond Windows</a><br> <li><a href="http://www.fool.com/investing/value/2007/10/29/microsoft-can-still-get-better.aspx">Microsoft Can Still Get Better</a><br> <li><a href="http://www.fool.com/investing/value/2007/10/30/microsoft-must-kill-google-now.aspx">Microsoft Must Kill Google, Now</a> [how can you resist with a title like that?]</li></ul> <p>Also, a useful earnings <a href="http://bespokeinvest.typepad.com/bespoke/2007/10/msft-earnings-a.html">table</a> that I came across:</p> <p><img id="BLOGGER_PHOTO_ID_5127633100158919298" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkGzKmbFYtxSdwpTL4K_i-HWx9WywY6QXBypKEKOWu_LrulVjcWy8VzE7jqzx_T4AebZbCVmXTJyqdh7FzaB8pEYK17LqfFjZawSpPSXA9Eh7htwlErxkdxuCM4vaFVJ6ODt_J/s400/bespoke+msft.jpg" border="0"></p></div>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com9tag:blogger.com,1999:blog-29195406.post-47846488281924485222007-10-25T08:43:00.001-07:002008-12-08T21:05:44.783-08:00Q1/08 Earnings<strong>Pre Results:</strong><br> <p>Some sample commentary heading into earnings:</p> <ul> <li><a href="http://biz.yahoo.com/ap/071023/microsoft_earnings_preview.html?.v=1">Earnings Preview: Microsoft</a><br> <li><a href="http://www.reuters.com/article/ousiv/idUSN2331898120071024">Microsoft investors eye rosy holiday quarter</a></li></ul> <p>The stock is having a <em>very</em> 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...</p> <p>[OT: BTW, for those who are interested, I think the <a href="http://blogs.cnet.com/8301-13505_1-9804329-16.html?tag=blg.orig">Facebook deal</a> 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... :-)]</p> <p><strong>Results:</strong></p> <p>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. <span style="color: #0000ff">FirstCall is reporting actual of $13.76B and EPS of .45 cents a share</span>. <strong>Wow!</strong> Still waiting on confirmation via MSFT...</p> <p>Confirmed: FirstCall got it right. It's a much-needed <strong><a href="http://biz.yahoo.com/prnews/071025/aqth132.html?.v=17">blowout</a>:</strong></p> <p><img id="BLOGGER_PHOTO_ID_5125390620914138322" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibMOi4iDp1iKmVfCYlVAV6WsdnQCBIs6XeJeiwhT01lKwInP-TWowuJzCjqPm8fCozCuatcS-83O31sL2h_QORqmIgyGoiHG1VIULhUlMvVU4IsHTKGhrpco6-RbQCAkFmQmkM/s400/table.jpg" border="0">(More after I review the actual earnings release and listen to the conference call.)</p> <p><strong>Post results and conference call:</strong></p> <p>Okay, that's done. Other key positives:</p> <ul> <li>Fastest Q1 revenue growth since 1999. <li>Operating income at 30% exceeded revenue increase of 27%. <li>Operating margin up ~2 points to 43%. <li>As seen above, every business grew double-digits. <li>Client growth <em>exceeded</em> overall PC growth for a change(primarily due to piracy reduction, especially in fast-growing emerging markets). <li>"The OEM Premium Mix increased 16 percentage points to 75% driven by increased consumer premium mix". <li>Server & Tools continued to lead in bottom line leverage (16% revenue growth but ~25% earnings growth). <li>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). <li>Q2 guidance raised to $15.6B - $16.1B and EPS of .44-.46 versus consensus $15.64B and EPS of .44. <li>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.</li></ul> <p>Negatives: </p> <ul> <li>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 <em>relative</em> 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. <li>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. <li>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). <li>E&D growth guidance for Q2 of -8% to flat. Blaming it on earlier Q1 ramp, but something seems odd there. <li>Unearned on the Balance Sheet decreased ~$1B vs Q4 (recognition also increased ~$1B vs year ago). <li>Common stock repurchases decreased ($2,930B versus $7,683B). <li>See increased risk of an economic slowdown. </li></ul> <p><a href="http://blogs.barrons.com/techtraderdaily/2007/10/25/microsoft-cfo-liddell-a-good-clean-quarter-stock-soars-10-after-hours-to-highest-level-since-01/">Says</a> CFO Liddell: </p> <blockquote> <p>It was just a very clean quarter, outstanding financial results.</p></blockquote> <p>Yes it was. What a refreshing change. </p> <h2>Kudos to all. </h2> <p>BTW, MSFT traded as high as $36.02 in <a href="http://www.nasdaq.com/aspxcontent/ExtendedTradingTrades.aspx?mode=frameset&kind=&symbol=msft&symbol=&symbol=&symbol=&symbol=&symbol=&symbol=&symbol=&symbol=&symbol=&selected=msft&FormType=&mkttype=AFTER&pathname=&page=afterhours">AH</a>. 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. </p> <p><strong></strong> </p> <p><strong>Update:</strong> Made a few revisions/clarifications after listening to the cc again. </p> <p><strong>Update #2:</strong> A nice summary of analyst's reactions this morning following last night's results:</p> <p></p> <ul> <li><a href="http://blogs.barrons.com/techtraderdaily/2007/10/26/microsoft-next-stop-40/">Microsoft: Next Stop, $40?</a></li></ul> <p><strong>Update #3</strong> (10/29/07):</p> <p>Hmm...that didn't take long. Finally get a pop in the stock and <a href="http://secfilings.nasdaq.com/filingFrameset.asp?FileName=0001193099%2D07%2D000064%2Etxt&FilePath=%5C2007%5C10%5C29%5C&CoName=MICROSOFT+CORP&FormType=4&RcvdDate=10%2F29%2F2007&pdf=">Director Jon Shirley sells 500K shares</a> - 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 <a href="http://secfilings.nasdaq.com/filingFrameset.asp?FileName=0001193099%2D07%2D000062%2Etxt&FilePath=%5C2007%5C10%5C26%5C&CoName=MICROSOFT+CORP&FormType=4&RcvdDate=10%2F26%2F2007&pdf=">unloads a chunk</a>, albeit a much smaller % of total held.</p>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com12tag:blogger.com,1999:blog-29195406.post-73198974106380425562007-10-20T11:16:00.001-07:002007-10-24T20:24:00.428-07:00What if Microsoft wasn't a screwup?<p>I had coffee with a friend last week who is ex-MSFT. He follows my blog and asked why I hadn't posted recently. I told him that I'd actually penned three different posts but decided not to publish any of them. <p>The first touched on Vista's challenges and the growing threat from AAPL (short version: Vista has stumbled badly. Forget the original 2X the rate of Windows XP goal, it's barely tracking it - a damning indictment after 5 years of development and some $5B spent. Also, AAPL is gaining serious momentum - verifiably as well as anecdotally. If MSFT continues to do next to nothing about it, they risk losing not just more marketshare, but possibly OEM loyalty). The second reviewed Ballmer's latest plan to "transform" MSFT (the future isn't in <em>plastic</em>, Benjamin Braddock, it's in <em>advertising</em>. Hmm.. I <a href="http://moneycentral.msn.com/investor/invsub/results/hilite.asp?Symbol=GOOG">wonder</a> how he <a href="http://moneycentral.msn.com/investor/invsub/analyst/earnest.asp?Symbol=goog">twigged</a> to that <a href="http://finance.yahoo.com/q/bc?t=5y&s=GOOG&l=on&z=m&q=l&c=MSFT">one</a>? BTW, is that the 9th or 10th transformation since Ballmer took over? I'm losing track.). Finally, I did one on the eternal bad news story: the stock. In particular, some recent Ballmerbabble - when he wasn't busy making more idle <a href="http://blogs.zdnet.com/microsoft/?p=810">patent threats</a> against Linux:</p> <blockquote> <p>Mr Ballmer says that the sluggishness is in part the result of overly optimistic Wall Street targets - misguided calculations by “all these expensive, well-meaning financial types” - and in part a function of Microsoft being a technology company subject to more risk than a “bricks and mortar business, like Tesco”.</p></blockquote> <p>("Overly optimistic Wall Street targets"? "Being a technology company"? Sure, Steve. Um, how come that hasn't affected say, <a href="http://finance.yahoo.com/q/bc?t=5y&s=AAPL&l=on&z=m&q=l&c=msft">AAPL</a>? Or <a href="http://finance.yahoo.com/q/bc?t=5y&s=HPQ&l=on&z=m&q=l&c=msft">HPQ</a>?, or <a href="http://finance.yahoo.com/q/bc?t=5y&l=on&z=m&q=l&p=&a=&c=msft&s=sap">SAP</a>?, or <a href="http://finance.yahoo.com/q/bc?t=5y&l=on&z=m&q=l&p=&a=&c=msft&s=intc">INTC</a>?, or <a href="http://finance.yahoo.com/q/bc?t=5y&l=on&z=m&q=l&p=&a=&c=msft&s=orcl">ORCL</a>?, or <a href="http://finance.yahoo.com/q/bc?t=5y&l=on&z=m&q=l&p=&a=&c=msft&s=ibm">IBM</a>?, or... well, you get the picture.)</p> <p>BTW, in the second one Ballmer said about advertising:</p> <blockquote> <p>“It gives us the chance to surprise shareholders,”</p></blockquote> <p>A simpler way to "surprise shareholders" would be to concentrate on doing what he/MSFT already <em>chose</em> to do, only doing it <u>well</u>. Let's start with the basics. Like, say, understanding customer's needs well enough to ensure you have designed a compelling product, then actually shipping any [major] one on time, doing a great job of marketing it, and - this is key - make a profit. Combine that with some sanity wrt headcount increases (especially in the US), and maybe consensus EPS estimates might look more like <a href="http://moneycentral.msn.com/investor/invsub/analyst/earnest.asp?Page=ConsensusEPSTrend&Symbol=aapl">this</a>, rather than like <a href="http://moneycentral.msn.com/investor/invsub/analyst/earnest.asp?Page=ConsensusEPSTrend&Symbol=MSFT">this</a>. Investors might even award a PE <em>premium</em> to market, versus the current <a href="http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=PriceRatios&Symbol=MSFT">discount</a>. </p> <p>Anyhoo... despite spending several hours writing those three posts, I didn't bother hitting the "Publish" button in Windows Live Writer (an excellent product btw). Why? Because frankly there was nothing much new there. Sure, the specific examples were current. But the basic underlying themes have been discussed here and elsewhere <em>ad nauseam</em>. And while it would be nice to ponder what could happen if MSFT stopped being such a screwup, as John Dvorak does <a href="http://www.marketwatch.com/News/Story/Story.aspx?guid=%7bE310185E-4EC2-429C-BF93-C14D79F91691%7d&siteid=nbs">here</a>, including this amusing "glass is half full" statement:</p> <blockquote> <p>Because there is so much room for improvement at all levels, there's great upside potential for Microsoft.</p></blockquote> <p>the fact is that current leadership show few signs of even acknowledging their screwup status, far less attempting to address it. [btw, yes I understand the surface-level oxymoron of calling a $50B company a screwup. It's a statement relative to <em>potential</em>] </p> <p><font color="#404040">Case in point, <a href="http://www.forbes.com/technology/2007/10/18/microsoft-google-domination-technology-software-cx__wt_1018microsoft.html">here's</a> Forbes succinctly describing some of the challenges in an article entitled "</font>Microsoft: Time To Plot A Comeback<font color="#404040">"?:</font></p> <blockquote> <p>The Redmond, Wash.-based software giant faces growing competition in its core software business, which dominated the industry for two decades, and it hasn’t had a bottom line-galvanizing success in any other area recently. It was late to online advertising, letting <b>Google</b> (nasdaq: <a href="http://finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?tkr=GOOG">GOOG</a> - <a href="http://www.forbes.com/markets/company_news.jhtml?ticker=GOOG">news </a>- <a href="http://www.forbes.com/peopletracker/results.jhtml?startRow=0&name=&ticker=GOOG">people </a>) all but run away with that sector. It hasn’t had a big Web 2.0 hit yet. Thank god for Halo 3!</p></blockquote> <p>Ballmer's response? He's "not worried", according to Forbes. Indeed:</p> <blockquote> <p>Just give Microsoft a little more time, Ballmer said. </p></blockquote> <p>Apparently the better part of a decade hasn't been enough. He goes on to add: </p> <blockquote> <p>"I’m happy with everything but everything needs some improvement –sort of like your kids," said Ballmer, who strode onto the conference stage toting a vente-sized Starbucks iced tea.</p></blockquote> <p>Steve must be the only MSFT shareholder who is "happy with everything". He must also be one of the few company followers who thinks MSFT is in good shape overall and just needs some tweaking around the edges. Frankly, I'm starting to wonder if the CEO's of MSFT competitors don't wake up every morning, check the web, and say "He's still CEO. Thank God!". I have visions of Schmidt, Jobs, Benioff, Szulik, virtually every Web 2.0 CEO, and even Ellison and Palmisano, uttering a collective sigh of relief each a.m., happy in the knowledge that with Ballmer at the helm the MSFT pit bull of old - which Joe Wilcox <a href="http://www.microsoft-watch.com/content/vista/vista_cat_scratch_fever.html?kc=MWRSS02129TX1K0000535">says</a> "mauled IBM, Lotus, Netscape, Novell, WordPerfect and so many other high-tech companies in the 1990s" - will remain a fat and slow moving Saint Bernard, inspiring about as much fear and respect as a yapping Chihauhau.</p> <p>Meanwhile, Goldman Sachs is beating the drum for MSFT (again), <a href="http://blog.seattlepi.nwsource.com/microsoft/archives/123759.asp">adding them back</a> to their America's Conviction Buy List after taking them off six months earlier. Putting aside the fact that Goldman has been wrong about MSFT virtually every year since 2000, let's look at the specifics of what analyst Sara Friar said <a href="http://communities.canada.com/nationalpost/blogs/tradingdesk/archive/2007/10/09/microsoft-looks-good-near-term-despite-long-term-uncertainty.aspx">earlier</a> when she reiterated her "Buy" and $37 target:</p> <blockquote> <p>"Microsoft stands at a major juncture in its life cycle, with near term product cycles balanced out by longer term uncertainties as new areas as software-as-a-service, virtualization and open source [software] seek to diminish Microsoft's grip on the desktop." </p></blockquote> <p>Hmm... is it just me or did Sara not get the Ballmer memo saying everything is in good shape? Seriously, this is one of the top-ranked software analysts, trying to make the bullish case for MSFT, and this is the best she can come up with? Does that sound like someone who believes MSFT just needs some tweaking? And I'm not talking about the list of "uncertainties" - we already knew those, and could make an equivalent list for AAPL, GOOG and every other company. It's her implicit lack of <u>confidence</u>. </p> <p>And that, in a nutshell, really sums up the problem with MSFT. In the case of GOOG, AAPL, and virtually every other large peer/competitor, the market has strong confidence that those companies can adapt, overcome, and continue to grow and prosper. That's borne out by analyst's opinions, premium to market P/E's, stock performance, growth expectations, etc. In Microsoft's case, on the other hand, they're not nearly as convinced. Why? Is it just the "law of large numbers"? That's part of it. But primarily it's the post 2000 track record of poor "bets", even poorer execution, and chronic overspending, all of which come together in the lack of visibility wrt future earnings leverage. Hence the reason why even after five years of this stock going <strong>absolutely nowhere</strong>, $50B+ spent on buybacks, $30B+ down the hole in R&D, and $10B's of new "investments", most analysts still can't make a case for more than 20% upside from current levels, and the stock continues to badly underperform. Meanwhile, they have no trouble doing so for AAPL, GOOG and many others - despite their already <u>spectacular</u> runs - and those issues continue setting new all-time highs (AAPL and GOOG increasing more in the past month alone than MSFT has in the past 5 years).</p> <p>All of which brings me to the <em>opportunity cost</em> of continuing to hold Microsoft. In my view, there's little doubt that GOOG will surpass MSFT in total marketcap sometime in the next two years (it's already above $200B). And while it's harder to see AAPL doing that even over a slightly longer timeframe, it's not impossible given current trajectories. But even putting these super-performers aside, MSFT is down ~11% YTD relative to the NASDAQ market generally. And this was meant to be the "big year". Do you think MSFT is going to increase 11% more than the market over the next twelve months to catch up for the past twelve? Possible, but unlikely. Outperform it by ~33% over the next year or two to catch up for the past three? Straining belief. 90% any time soon to make up for the past five? Fahgetaboutit! </p> <p>The market, it seems, doesn't much care about what <em>might</em> happen if MSFT weren't a screwup. They only care that MSFT is one, and is in total denial about it. As critical as I have been, I have always been optimistic that this company could eventually get back on track. That optimism is fading. Turns out the market was right five years ago when they ignored Ballmer's rosy outlook and disconnected MSFT from the broader averages. Flash forward to today, and again the market is sending a negative message while Ballmer waxes poetic. Only now, the market is the sole one with any credibility.</p> <p><strong></strong> </p> <p><strong>Update:</strong> And the comedy of errors continues...</p> <ul> <li><a href="http://www.hunterstrat.com/news/2007/10/22/microsoft-slips-dynamics-nav-51-to-2h2008/">Microsoft slips Dynamics NAV 5.1 to 2H2008</a></li></ul> <p>Somebody help me out. Is that Dynamics NAV, Longhorn Server, Viridian, Windows XP SP3, Office for the MAC, Silverlight 1.1, and CRM 4.0 (aka Titan), all delayed just this year alone? Or am I missing some other major ones (let's not even bother with the minor ones)?</p> <p><strong>Update #2</strong> (10/24/07): Further to AAPL challenge and OSX vs Vista:</p> <ul> <li><a href="http://ptech.allthingsd.com/20071025/leopard-faster-easier-than-vista/">Leopard: Faster, Easier Than Vista</a></li></ul> <p>Nice. Sure, it's MAC fan Walt Mossberg. Still, it's difficult to argue that several of the features in Leopard aren't superior to Vista and/or better implemented. Also, that relative performance on similar hardware favors OSX. Meanwhile, MSFT pumps out some Vista performance updates (which in my experience provide only marginal improvement) and hosts holiday "<a href="http://blogs.zdnet.com/microsoft/?p=865">preview events</a>". And we wonder why AAPL is gaining market share at MSFT's expense...</p>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com19tag:blogger.com,1999:blog-29195406.post-4222893278196252462007-09-22T18:32:00.001-07:002008-12-08T21:05:45.111-08:00Change, or more of the same? It's up to YOU.<div> <div> <div>It's proxy season again. And thanks to new corporate compensation rules, you'll find more detail than ever in this year's <a href="http://microsoft.shareholder.com/redesign/EdgarDetail.asp?CIK=789019&FID=1193125-07-205208&SID=07-00">document</a>. For example, you'll learn that while CEO Steve Ballmer may have been unable to get the trains to run on time, invest in areas that actually return a profit, catch major new trends, restore confidence, or get this moribund stock moving despite record buybacks using <em>our</em> cash, he was paid less than most CEOs to do it. The Board, in their collective wisdom, think that constitutes being "underpaid". I think it proves the old adage <font color="#0000ff">"you get what you pay for"</font>. </div> <div> </div> <div>The proxy also gives the deepest glimpse yet into the mysterious formulas and metrics which underpin the so-called Shared Performance Stock Award (SPSA), indelicately referred to as the "executive feeding trough" from time to time by a certain shareholder blogger. In particular, you'll learn that senior most leadership walked away with millions each, because the company aims to pay "above the median" for such top talent (read: way above). However, that was only half what they <em>could</em> have received. The Board, you see, may sit idly by as you and I continue to lose money on our investment. But they want you to know they're no pushover:</div> <div> </div> <blockquote> <p>We were satisfied with our performance in product acceptance and SMSG and MBD financial metrics. Our performance in customer satisfaction, while steady, and Internet searches, while growing, fell short of our challenging goals, and we were not satisfied with our performance in EDD financial metrics. <br><br></p></blockquote> <p>BTW, that last one is a euphemism for "even we understand that we can't be seen to condone another $1B loss of shareholder cash - on top of the mind-blowing $5B lost so far - even though it resulted from a strategy we approved of rushing a product to market without adequate testing". Hmm...think that disappointment translated into maybe zero SPSA payout for H&E head Robbie Bach? Doesn't say. Here's my wild-ass guess: "No".</p> <p>Steve and the Board also want you to know that part of the reason for the large compensation payments is too retain these key individuals. Apparently folks who collectively can't lead, execute, or inspire, are in high demand. Go figure.</p> <p>Along the way you'll learn that the stock price is not part of the extensive SPSA metrics. What's that line again about <font color="#0000ff">"you get the performance you request and reward"</font>? However, rest assured that the general Compensation Philosophy includes this objective: </p> <blockquote> <p>provides a significant portion of total compensation linked to achieving performance goals that we believe will create shareholder value in the near and long term</p></blockquote> <p>Just in case the stock being down 50% since 2000 and <a href="http://msftextrememakeover.blogspot.com/2007/08/growth-play-value-play-or-just-lousy.html">having badly underperformed all major indexes and most peers this entire decade</a> has caused you to er... maybe question the value of their beliefs?</p> <p>Also, be advised that the massive insider selling which has become the hallmark of MSFT post 2000 - and a frequent topic here - has now caused sufficient embarrassment that the usual "we don't comment on sales by our executives" is no longer sufficient. From now on, executive officers will be forced to keep a multiple of their salary in company stock (3-10X base pay depending on level). Doesn't that just fill you with confidence that the supposed "creme de la creme" of MSFT management need to be forced to hold this stock? And don't worry about our fearless leader Ballmer:</p> <blockquote> <p>Because his interests are already closely aligned with shareholders’ interests...<br><br></p></blockquote> <p>Again, in case that wasn't as um...obvious from the stock's decade-to-date performance as it might be.</p> <p>Also intriguing is what's <u>not</u> in the proxy. If you're a regular reader of it, you'll recall this chart which has appeared annually and compares MSFT to the S&P and NASDAQ (apologies for the image quality):</p><img id="BLOGGER_PHOTO_ID_5113207512512923410" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEip-b_w5F6-KCbdlJaXZn9MaLH8r6oenBNzCGwhtODTFdRy4TLuh2T3jqRjJCmncV850IUfBXqQYCuOQkBNNrZ0priJ-ujC-KIIQ9T_MsF-LwVgEFGy0v4a_DOTAttahTsv19X-/s320/performance.jpg" border="0"><br> <p></p> <p></p> <p>Apparently, even the <em>extreme</em> creativity that has been used to draw the scale historically is no longer sufficient to mask the chronic underperformance. And since reminding shareholders of how badly <em>they've</em> done while detailing how much management got <em>paid</em> for doing it is bad form - not to mention potentially career limiting - <font color="#0000ff">POOF!</font><font color="#000000">, </font>it's gone. And with it, final abdication of responsibility by current leadership for the stock - something that's been evident for years, but is now seemingly official. </p> <p>All in all, this proxy has all the spin, half-truths, non-sequiturs, outright fiction, and disdain for reader's intelligence worthy of say, a recent Vista "Momentum" press release. Since I want to be constructive, here's how we can radically improve and streamline it while also saving a few thousand trees. Instead of wasting pages and pages on excuses and justifications for lavish compensation in the face of abject failure on behalf of shareholders, simply provide us with one page containing two items: </p> <p>1) A 5-year stock chart comparing MSFT to the S&P and NASDAQ indices (drawn using normal scale):</p><img id="BLOGGER_PHOTO_ID_5113208049383835426" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPGmlnqfegc-Pf0vaRC9y72FMgEFcAKM98Cl5af1PkESuVjNqdF9hG9IUj8RPUAg7yV_MSBDbtDxHwYL-fT2e3Vb7JoVCaA9iCOyg1RYPO9Wm8Ii9tSeHWfUlqDu4bfpYoLt4q/s320/5yr.jpg" border="0"> <p></p> <p>2) A clear choice:</p> <p><img id="BLOGGER_PHOTO_ID_5113208208297625394" style="display: block; margin: 0px auto 10px; cursor: hand; text-align: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjiZnum_f32zSiqat7U4Q9aiy1FpI29Mk9aBJgYG7yZTsoBBLIvW3p9f4M5oP3qZCVHRLQV7cvr3xxvJ0y6cTOyLwFoi_p39w4j5BQ8q_ljhCrXuQCNQpI3qNJ6r6B92gmeHsPN/s320/checkbox.jpg" border="0"><br>Simple, huh? </p> <p>And for all those hotshot managers whom the Board is paying millions to because they're so worried about retaining them, and who have to be forced to hold the stock, I say "quit". PLEASE. In many cases, the best possible development for Microsoft would be to have some of you go to the competition and screw them up instead. I'll happily take some less-senior person who actually still believes in the company, has vision, and can inspire others. </p> <p>Alternatively, if despite the <a href="http://finance.yahoo.com/q/it?s=MSFT">demonstrated</a> lack of confidence you're all truly convinced that your strategies - which the street hates - are actually brilliant, then march on down to your local bank consortium and pitch them on lending you $270B (less Bill & Steve's share if they're willing to go along), plus say a 20-30% premium. Then you can buy us out and take the company private. That way, if you continue to execute as you have, it will be coming out of your dime instead of ours.</p> <p>Fellow shareholders, the ball's in your court. You know which way I'm voting.</p></div></div>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com29tag:blogger.com,1999:blog-29195406.post-54668282258550778442007-09-17T09:34:00.001-07:002007-09-20T10:42:04.605-07:00No one survives the European Inquisition<p>Sorry to bastardize a line from Monty Python. But there's no way to sugar-coat it; <a href="http://news.zdnet.com/2100-9595_22-6208274.html">MSFT got clocked in Europe today</a>. That was a loss of <u>staggering</u> proportions. Where most had expected a split-decision - myself included, the Court of First Instance upheld virtually the entire EU Commission case:</p> <blockquote> <p>The Court of First Instance essentially upholds the Commission's decision finding that Microsoft abused its dominant position," a court statement said.</p></blockquote> <p>As a result, the judgments on both bundling and interoperability information stand. As does the record fine. MSFT even gets to pick up 80% of the EUC's legal costs and that of several competitive rivals - or at least rival-backed lobbying groups (EUC picks up 20% of MSFT's costs). What I haven't seen covered is whether this is likely to open the floodgates to additional litigation/financial settlements with competitors in Europe (as it did in the US following the Final Judgment). </p> <p>Caveat: I haven't read the <a href="http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&newform=newform&alljur=alljur&jurcdj=jurcdj&jurtpi=jurtpi&jurtfp=jurtfp&alldocrec=alldocrec&docj=docj&docor=docor&docop=docop&docav=docav&docsom=docsom&docinf=docinf&alldocnorec=alldocnorec&docnoj=docnoj&docnoor=docnoor&typeord=ALLTYP&allcommjo=allcommjo&affint=affint&affclose=affclose&numaff=&ddatefs=&mdatefs=&ydatefs=&ddatefe=&mdatefe=&ydatefe=&nomusuel=Microsoft&domaine=&mots=&resmax=100&Submit=Rechercher">detail</a> of the Court's decision. Supposedly, MSFT will be still be allowed to improve its products. But when the court found no technical advantage to bundling Media player the way they did, you have to wonder how high the bar will be to add anything without a major fight from a further emboldened EUC. And make no mistake, they are that:</p> <blockquote> <p>“The ruling confirms more than ever that Microsoft must comply,” said EU Competition Commissioner Neelie Kroes. “I will not tolerate continued noncompliance.”</p></blockquote> <p>Additionally, chances that Office and Vista - both of which are under investigation - will now be subject to further EUC demands and or charges seems like a foregone conclusion.</p> <p>As readers know, I personally thought the European case was far weaker than the US one. Nevertheless, MSFT's legal team went down to total defeat. While they can still appeal to Europe's highest court, that is now restricted to much narrower rules of law only. It's TBD whether they will do so. If they're smart they won't. Which of course means... </p> <p>Here's the current <a href="http://www.msnbc.msn.com/id/20818452/">party line</a>:</p> <blockquote> <p>“I don’t want to talk about what will come next,” said Microsoft lawyer Brad Smith. “We need to read the ruling before we make any decision.”</p></blockquote> <p>EUC head Neelie Kroes is quoted as saying that her view of "success" [now] would be for MSFT's European marketshare to eventually drop to 50% or so. An aide later felt compelled to add that she meant "as a result of normal competitive forces". Sure.</p> <p>Meanwhile, the stock is off $0.37 or 1.27% on decent but not spectacular volume (presently). The market appears to be trying to decide if this is at least short-term resolution - which they like, versus the beginning of the end for MSFT's dominant market position in Europe - which of course they don't like. Unless the US Administration brings some persuasion to bear to keep the EUC in check, MSFT - and possibly other dominant companies - are going to find it even tougher doing business in Europe. Oh well, at least we got that $0.10 dividend last week. Did you even have a chance to spend it yet?</p> <p> </p> <p><strong>Update:</strong> (related)</p> <ul> <li><a href="http://money.cnn.com/2007/09/17/technology/microsoft_ruling_analysis.fortune/?postversion=2007091717">Microsoft loss is bad news for Apple, Google</a></li></ul> <p>and,</p> <ul> <li><a href="http://afp.google.com/article/ALeqM5jZjtOGKGoy-UxGzEN3us3OoPtFkA">Harsh reaction in US to Microsoft EU antitrust ruling</a></li></ul> <p>Excerpt: </p> <blockquote> <p>Thomas Barnett, head of the Justice Department's Antitrust Division, said the European Court of First Instance (CFI) in the case against the US software giant may do more harm rather good for consumers. <p> <p>"Rather than helping consumers, (the decision) may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition," the US official said in a strong rebuke of the EU action. <p> <p>Barnett said that in the United States, "the antitrust laws are enforced to protect consumers by protecting competition, not competitors" and that barring "demonstrable consumer harm, all companies, including dominant firms, are encouraged to compete vigorously."</p></blockquote> <p><strong>Update #2</strong> (9/19/07):</p> <p>Joe Wilcox adds his two cent's worth on the potential implications of this ruling:</p> <ul> <li><a href="http://www.microsoft-watch.com/content/corporate/what_microsofts_eu_ruling_means_to_you.html">What Microsoft's EU Ruling Means to <em>You</em></a></li></ul> <blockquote> <p>What the European Commission wants is the breakup of Microsoft without severing the business asunder.</p></blockquote> <p>Gives you the basic tone, if you want to save yourself the effort.</p> <p>Paul Thurrott <a href="http://www.internet-nexus.com/2007/09/apple-defends-itunes-in-berlin-brussels.htm">links</a> to an interesting piece re: potential impact of this judgment for AAPL:</p> <ul> <li><a href="http://news.bbc.co.uk/2/hi/technology/7002612.stm">Time for Apple to face the music?</a></li></ul> <p><strong>Update #3</strong> (9/20/97)</p> <p>Last one, I promise:</p> <ul> <li><a href="http://www.latimes.com/news/printedition/opinion/la-ed-microsoft20sep20,1,2969051.story?coll=la-news-comment">Microsoft vs. Europe</a></li></ul>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com30tag:blogger.com,1999:blog-29195406.post-24507093404156264122007-09-13T16:25:00.001-07:002007-09-20T20:13:49.470-07:00Still searching for a dividend strategy<p>Okay, so I've posted before about MSFT's dividend strategy:</p> <ul> <li><a href="http://msftextrememakeover.blogspot.com/2006/11/what-exactly-is-msfts-dividend.html">What exactly is MSFT's dividend strategy?</a> <li><a href="http://msftextrememakeover.blogspot.com/2006/09/penny-for-your-thoughts.html">A penny for your thoughts?</a> </li></ul> <p>More specifically, their lack of one. I also noted in a recent <a href="http://msftextrememakeover.blogspot.com/2007/07/like-us-or-leave-us.html">post</a> that CFO Liddell dropped some hints that led me to believe we'd see some changes:</p> <blockquote> <p>He also seemed to foreshadow some improvement in the dividend strategy (which has been a total mess so far). Although he still expressed a preference for buybacks vs dividends.</p></blockquote> <p>Well, late yesterday we got MSFT's apparent first attempt at <a href="http://biz.yahoo.com/ap/070913/microsoft_dividend.html?.v=1">that</a>. [note: someone might want to tell Investor Relations to update their dividend section since it still reflects the old info]. As we've come to expect from this leadership team, it was done in the usual clumsy, ineffective manner - at least if it was meant to communicate a move to a more serious, competitive, dividend strategy versus the previous hodgepodge. </p> <p>The actual announcement? Another .01/Quarter increase - just like last time. That brings us to .44 annually, or 1.51% yield at the current closing price. But due to the now higher share value, that's actually a <u>lower</u> yield than when MSFT announced the last dividend increase (1.51% vs the then 1.54%). It's also a smaller % increase on its own. Clearly, management isn't telegraphing much confidence in the future stock price despite its depressed YTD performance. </p> <p>By way of comparison, INTC's current yield is 1.77% and IBM's is 1.6%. The S&P 500 <em>average</em> is 1.71% (2.2% if you count just dividend-payers) and the DOW 30 average is around 2.3%. In other words, even with this increase, MSFT's dividend lags behind the S&P 500 average, the DOW 30 average, and behind some of its equivalent tech peers - as it has since <u>inception</u>. But the "bonus" is that you get worse-than-market stock performance too! For example, down over 2% YTD while the NAS is up more than 7%, for a total <strong>9%</strong> <strong>relative underperformance</strong> (7%, if you want to compare to the S&P).</p> <p>If you're looking for a bright spot, I guess you hang your hat on the fact that a penny still represents a 10% increase. Also, that the announcement comes in the same month as last year (versus December previously). That and the same [nominal] increase, is at least a move towards some consistency. Of course if you're cynical, you could infer that MSFT management simply decided that dividend increases are one way to placate disappointed investors ahead of the annual shareholder's meeting. Now you see the pea, now you don't...</p> <p>As posted above, Liddell (at least) still professes a preference for buybacks over dividends. I'm unsure why personally, and he's never elaborated. FWIW, I'm not against buybacks per se. My problem with the <u>MSFT</u> variety is that for most of their life they've gone to offsetting dilution vs actually reducing shares outstanding. They've been much more effective at the latter over the past 1-2 years, but MSFT can no longer sustain that pace without further reducing cash and/or doing what some Wall St. fund managers have actually suggested: taking on debt to do even larger ones. Buybacks also have an inherent risk that management will abuse them to game EPS or prop up the stock, rather than buying because they truly believe their shares are undervalued. Not that this team would ever do that, of course. Cough, cough...</p> <p>Nevertheless, you can be confident there will be more buybacks, if only to offset ongoing dilution from management/employees and the increased supply in the market caused by Gates massive ongoing sales. Hopefully, we'll also see more dividend increases and an attempt to actually be on par with at least the average, if not true peers. While some will argue that MSFT should have better things to do with their cash than pay dividends or do buybacks, I say:</p> <p>1) Dividends represent a significant % of the oft-quoted historical "market" return for equities</p> <p>2) MSFT is still way over capitalized and kicking off far more cash that the business requires, especially the profit centers. </p> <p>3) This leadership team has shown little aptitude for making wise investments with spare cash - quite the reverse, in fact.</p> <p>Bottom line, I'll take the penny per quarter increase. Thanks. Maybe shareholders will almost break even on the stock by year end now. But MSFT needs to either get a competitive strategy in place for dividends asap, or rethink why they bothered to implement a dividend in the first place. Alternatively, the leadership team can just continue to do nothing and wonder why investors aren't particularly interested in a stock that has both below-market performance and a below-market dividend.</p> <p> </p> <p><strong>Update:</strong> OT to this post, but worth a mention. If you've been following the media fallout on <a href="http://www.microsoft-watch.com/content/operating_systems/windows_updates_sneaky_updates.html">this</a> issue today, see MSFT's response <a href="http://blogs.technet.com/mu/archive/2007/09/13/how-windows-update-keeps-itself-up-to-date.aspx">here</a>. Didn't resolve all questions, but nicely done. Kudos to Nate and his team for putting together a timely, comprehensive explanation while still acknowledging the need to provide greater clarity in future.</p>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com1tag:blogger.com,1999:blog-29195406.post-53158104056554108582007-09-10T10:59:00.001-07:002007-09-20T20:24:36.985-07:00Walking the walk versus talking the talk<p><a href="http://minimsft.blogspot.com/">Mini-Microsoft</a> has a very good <a href="http://minimsft.blogspot.com/2007/09/microsoft-company-meeting-2007.html">post</a> that reviews the recent Company Meeting. Looks like he came away happy with the content. Most interesting to me - and a seeming highlight for some others - was Steve Ballmer giving a speech where he reviewed a company scorecard:<br><br> <blockquote> <p>Especially impressive was <a href="http://www.microsoft.com/presspass/exec/steve/default.mspx">SteveB</a>'s scorecard slide where he ranked red/green/yellow how we fared against each of Linux/Oracle/IBM/Sony/Nintendo/Google/Apple/piracy etc etc, customer satisfaction, revenue, innovation, hiring, etc. I don't recall that ever happening before. In meetings past I always felt the execs sidestepped issues of consumer perception and confidence. </p></blockquote> <p>(via a link provided in Mini's post) <p>I'd blogged some time ago that MSFT needed a consistent scorecard for each business unit. It was painfully obvious from various analyst/financial community events that each group has been free to cherry-pick whatever metric they felt put them in the best light - no matter how silly that item was. So I'm encouraged that one apparently now exists. Of course mine included <strong>profitability</strong> and <strong>market share</strong>. It's unclear whether this one does. I had also suggested that each business unit be forced to report their scorecard at the Company meeting. There's nothing like the peer pressure of thousands of fellow employees/shareholders when you say, reveal that you lost another $1B and got your ass kicked by Nintendo - not that I'm singling out any group in particular, you understand. Still, it's encouraging that a consistent competitive scorecard now exists and that Ballmer et al resisted the normal urge to color all boxes green (assuming green is good). </p> <p>As I posted recently, a big problem for MSFT in the investor community is its refusal to acknowledge the many, many, mistakes and failures that have occurred this decade. Former hedge-fund manager and TV personality Jim Cramer captures this external perception nicely with this:</p> <blockquote> <p>"Microsoft, other than aQuantive, feels it's better at everything than anyone," Cramer said. "Maybe it was at one time. But that's a terrible amount of hubris to run a company with." </p></blockquote> <p>In my view, Ballmer's credibility would actually be enhanced by being more forthright and self-critical publicly. After all, it's not like the mistakes and failures aren't readily apparent to all. So the real concern is that management is blind to them and/or not focused on fixing them. To that end, will shareholders see the scorecard -or at least a sanitized version - along with a candid discussion at the upcoming meeting? Don't hold your breath. </p> <p>Getting back to Mini's post, I took a look through the comments. While some didn't like Ballmer's speech:</p> <blockquote> <p>SteveB speech was a big drag.</p></blockquote> <p>What eloquence! Several others - Mini included - apparently did. What really struck me though, were the number of comments where purported employees were still looking for Ballmer to solve the company's many problems. For example:</p> <blockquote> <p>I loved the meeting, and now my after thoughts - if Steve Ballmer was able to get that speech plugged into the org, to get that vision to drive the company, most of all the division I work for, then he's the greatest CEO on earth (that I know of), if not, he's just a pretty good speaker. </p></blockquote> <blockquote> <p>Many of you bash Ballmer, but I wonder whether his insistence at staying is because he realizes the 4 frat boy cheerleaders he has reporting to him are paper pushers. I hope that's the case, I hope he's just waiting for someone more inspiring to show up and then turn things over.</p></blockquote> <p>The first one claims to be from a [former] AQNT employee. So in that case, I can understand how he/she might be missing some historical context. However, as I read these and other comments where folks are looking to Ballmer as the savior, I'm thinking <span style="color: #0000ff">"Who do they think has been CEO since 2000?"</span>. Isn't <strong>seven years</strong> long enough that maybe Steve's impact in that role should already be visible? If so, does anyone seriously think that the lack of accountability, vision, and execution that has characterized the company this <em>entire</em> decade is suddenly going to change? For instance, if the "4 frat boys" are just paper pushers - which btw seems excessive, who hired and/or promoted them? Why are they still around? Answer: er...<u>Steve</u> and er...<u>Steve</u>. Now the <strong>caveat</strong> here is I didn't hear Ballmer's speech, nor do I know the context. Was it a long-overdue mea culpa for himself and the leadership team? That would be constructive. Or merely an explanation of the importance/difficulty of the current strategies? In other words, more excuse-laden calls for "patience"? Other? Who knows. And what are the concrete plans for overcoming the obstacles? As one poster commented:<br><br> <blockquote> <p>He mentioned a meeting with the financial analyst community a few weeks ago. If I heard him correctly, he said they asked him, "How will Microsoft succeed?". His answer left me scratching my head. He basically said (paraphrasing), “because we have to”, “we have great employees”, etc. Is that really an answer shareholders and investors want or need to hear?</p></blockquote> <p>I know what meeting he's referring to and that <em>is</em> a reasonable characterization of what Ballmer said. And no, it wasn't what shareholders and investors wanted to hear - hence the subsequent selloff. <p>I have mixed feelings penning this post. On the one hand, I'm happy that some employees left the meeting charged up. That's a good thing. I hate to pour cold water on it. On the other hand, unless Ballmer had an epiphany recently (or you subscribe to the "he wasn't <em>really</em> in charge until Gates left" scenario), logic suggests that MSFT under his leadership moving forward will be pretty much as it's been under his leadership so far this decade. Ballmer talks a good talk. He's been doing it for a long time. Sadly, results have proven that - for whatever reason - he can't walk the walk. So unless you're happy with the current status quo, real change is likely to require a new CEO. </p> <p></p> <p><strong>Update:</strong> (another recap of the recent Company Meeting)</p> <ul> <li><a href="http://www.pcworld.com/article/id,137076-c,companynews/article.html">How Bill Gates Sounded in his Goodbye Speech to Microsoft</a></li></ul> <p><strong>Update #2:</strong> Former COO Bob Herbold <a href="http://blog.seattlepi.nwsource.com/microsoft/archives/121623.asp?source=rss">chimes</a> in (courtesy Seattle PI's Todd Bishop). Excerpt (underline mine):</p> <blockquote>After giving other examples of how Porsche, Toyota and other large companies avoided business traps, audience member Janis Machala asked Herbold what trap Microsoft is stuck in. <u>Herbold said that Microsoft is hiring plenty of people, but one of the big challenges is that it has not been able to launch profitable new units that complement its existing businesses</u>. Microsoft also faces big hurdles as it attempts to transition to delivering software over the Internet, with Herbold calling it an "unnatural act" to ask 700 million people to upgrade their software through installations or buying new PCs. He said software "wants to come from a server."</blockquote> <p>Amazing how candid former execs can be after they are no longer face down in the <strike>SPSA</strike> feeding trough...</p>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com14tag:blogger.com,1999:blog-29195406.post-72283017882854013362007-08-30T09:28:00.001-07:002007-09-07T10:13:34.165-07:00Wanted: Significant MSFT shareholder with a spine<p>For some time now, I've been watching MSFT's laughable execution and downward spiral. I'm not talking about revenue, where the near-monopolies have proved strong enough that even this management team haven't been able to screw them up beyond modest growth rates. Or profits, where their anti-Midas touch has had more detrimental impact, but still not enough to throttle gains completely. I'm talking about the now almost institutionalized missed ship dates (the <a href="http://www.eweek.com/article2/0,1759,2177267,00.asp">latest</a> btw being Server 2008, which I believe makes for a delay on <u>every</u> major product release this year), largely uninspired products, endless gaffes, and of course investments that only bring losses, to name just a few. </p><p>As incredulous as I've been over this performance, I've been even more amazed by MSFT shareholders. While owners of other companies (most with far better track records than Microsoft this decade) have mounted serious campaigns to replace their leadership teams and Boards, MSFT shareholders have been largely silent. Indeed, the nascent pressure that was building for Ballmer's ouster 2-3 years ago has largely dissipated. MSFT shareholders are a binary lot, it seems. They either vote with their feet and sell (as they have for the past 5 years), or continue to hold and suffer in silence. And, of course, there's always the current leadership team telling us how super-fantastic everything is, or soon will be at least, while leading the market in insider selling. I tell you, sometimes it's enough for even me to question whether my perception of the company is accurate. But then I look at the stock price, or drop by <a href="http://minimsft.blogspot.com/">Mini-Microsoft</a>, and know that my view and that of the rest of the world is largely simpatico. Still, it's always nice to get corroboration. Which brings me to an article courtesy of David Hunter's <a href="http://www.hunterstrat.com/news/">Microsoft News Tracker site</a>:</p><ul><li><a href="http://community.zdnet.co.uk/blog/0,1000000567,10005867o-2000331777b,00.htm">Of Microsoft, china pigs and hungry bears</a></li></ul><p>Some excerpts:</p><blockquote><p>In 2017, what and how big will Microsoft's major revenue streams be? Even discounting hindsight, that's a lot harder to answer than the same question ten years ago: As Vista has proven, XP is good enough: that wasn't the case for Windows 95 or NT.</p></blockquote><p>Check.</p><blockquote><p>So Microsoft is a huge company with a fuzzy future. In many respects, it's underperforming, if not stalled.</p></blockquote><p> Double check.</p><blockquote><p>The company has huge stockpiles of cash, no debt, an enormous and predictable cash flow – and almost entirely stagnant growth prospects. It's got so much money it can lose tens of billions on a new project like the Xbox, and still keep the thing going. It can take five years to produce an update when its competitors are doing it every six months, and nobody cares. It has one mode of operation, and that's to charge ahead like a stegosaurus: its upper management, plentiful enough by themselves to populate an entire Jurassic landscape, rarely show signs of evolved thinking. When was the last time Microsoft surprised you with an unexpected sparkle of intelligence?</p></blockquote><p>Triple Check, although I strongly disagree with the "almost entirely stagnant growth prospects". At the risk of being overly simplistic, if you find new and innovative ways to save customers money, make them more competitive, or even entertain them, you can sell them more and grow nicely. If you largely sit on your ass and subject them to wave after wave of often marginal upgrades out of some delusional sense of entitlement, you can't. Is the former easy? No. Is it possible and routinely done by others? Yes. Oh, and for me it was sometime in the late 1990's for that question at the end there.</p><blockquote><p>There are huge savings possible by culling management and R&D, neither of whom seem to have the slightest positive effect on sales or products.</p></blockquote><p>Quadruple check, although maybe "slightest" is too strong. More accurate, imo, is that both have had wholly insufficient impact to justify their considerable cost.</p><p>Anyway, by now you're getting his drift. Or possibly think he's me, only far more concise and eloquent. He even states the scenario that I've posted here repeatedly:</p><blockquote><p>There is no way that the current state of Microsoft is the answer to any question concerning the sensible use of the resources within the company, and the massive inertia it possesses can only protect it for so long: either outside pressures will overwhelm it, or it'll collapse under the weight of its own contradictions. </p></blockquote><p>Sadly, I continue to fear that collapse (or at least several missed financial quarters) will be the eventual spark for change - and then even more people (employees and shareholders) are going to get hurt, and it may well be too late. But fwiw, the author (Rupert Goodwins) is more optimistic. He thinks a change is on the near-term horizon:</p><blockquote><p>This is the weather for a coup, whether by a posse of external shareholders with inside support or a rebel group of managers with help from the investors. The trigger point isn't far away – we're nearing the end of the multi-year transition period that's seeing Ray Ozzie and Craig Mundie replace Bill Gates. By now, the changes in Microsoft should be visible – but it's not looking that good.</p></blockquote><p>The "rebel group of managers" willing to back away from the SPSA feeding trough long enough to finally do the right thing for the company and shareholders, sounds like a tall order. A "posse of external shareholders" seems a lot more likely, but right now there's no obvious sheriff - or posse. A third option would be a former MSFT manager with external shareholder backing. Someone like Brad Silverberg, for example, who was right about the web when Gates and Ballmer were wrong and is no longer there because of it. But lately he's been <a href="http://seattletimes.nwsource.com/html/microsoft/2003853402_msfttransition260.html">praising them</a>. Or maybe he's just laying the groundwork for an impending return :-) </p><p>David Hunter notes this concern at the end of <a href="http://www.hunterstrat.com/news/2007/08/28/whither-microsoft/">his post</a>:</p><blockquote><p>It is certainly possible, but who is going to step forward to lead the charge?</p></blockquote><p>Excellent question. Where is our <a href="http://breakoutperformance.blogspot.com/">Eric Jackson</a>, the shareholder who successfully led the charge for YHOO's CEO departure and is now going after Motorola? Where is the person responsible for say, <a href="http://moneycentral.msn.com/ownership?Symbol=MSFT">Capital Research & Management Company's 530,043,392</a> shares held in MSFT? Why isn't he/she front and center raising concerns about their chronically underperforming investment? Or do they have to carry that much MSFT just to mimic the indexes in their funds? What about <a href="http://www.calpers.ca.gov/">CalPERS</a>? They're normally not shy about calling out an ineffective management team. Is MSFT somehow the only large cap they don't own a decent chunk of? Does anyone think Gates' own personal investment vehicle, Cascade Investment LLC, would sit idly by through five years of market underperformance and a flat-lined stock? If so, you've obviously forgotten how quickly they <a href="http://www.washingtonpost.com/wp-dyn/articles/A50718-2004Aug31.html">made their concerns known</a> to Six Flags management when they were displeased with the latter's execution. So where are all the Cascade-like equivalents that own this underperforming stock and company? Why aren't ANY of them visibly making their concerns known? Surely there's one money-manager out there that has his/her own money at risk, and/or actually believes in their duty to investors to ensure management accountability and performance in the companies in which they invest? Someone with some clout and a backbone? We just need one...</p><p><br /><strong>Update:</strong> </p><ul><li><a href="http://www.thestreet.com/s/thestreetcom-tv-recap-sifting-through-microsoft-rumor-mill/funds/realmoneyradiowrap/10378276.htmlpuc=googlefi">TheStreet.com TV Recap: Sifting Through Microsoft Rumor Mill</a></li></ul><p>Excerpts: </p><em><blockquote><p><em>Cramer said Microsoft is "so IBM </em><em>in 1988, it's frightening ... they think they're a nimble growth company."</em> </p><p>and,</p><p>"Microsoft, other than aQuantive, feels it's better at everything than anyone," Cramer said. "Maybe it was at one time. But that's a terrible amount of hubris to run a company with." </p></blockquote></em>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com5tag:blogger.com,1999:blog-29195406.post-22695204089107232082007-08-21T11:03:00.001-07:002007-09-07T12:41:50.767-07:00Home runs, base hits, virtual aspirations and actual failure<p>As shareholders we all want MSFT's "investments" to pay off. The company obviously can't live on just its legacy cash cows forever. New accretive investments offer the potential for not just keeping the company strong, but also [finally] accelerating earnings.</p><p>Unfortunately, as per my <a href="http://msftextrememakeover.blogspot.com/2007/08/growth-play-value-play-or-just-lousy.html">last post</a>, most haven't over the past decade. Sure, they've taken the up-front cash required by most investments - way more than most in fact. It's that niggling little thing called profit, or shareholder value created, that's proven elusive for the current leadership team. Which is why we now get CFO Liddell belatedly telling us that we shouldn't look for normal internal rates of return from these efforts like at other companies. MSFT "investments", you see, are <em>special</em>. They don't follow normal convention. Instead, they are "winners-take-all" events. MSFT is swinging for the fences; They're not interested in mere base hits. And all those apparent strikeouts so far? Well, they're hoping the game goes into extra innings.</p><p>Let's examine how this has worked out in just one area - virtualization. Back in 2003, in a uncharacteristically non-laggard move, <a href="http://www.microsoft.com/presspass/press/2003/Feb03/02-19PartitionPR.mspx">MSFT bought the virtualization guts from Connectix</a>. Since that time, they've done what they often do after making an acquisition: buried it in bureaucracy, forced it to be a cog in some massive overall strategic architecture plan, and continued pouring cash into it. The result? <a href="http://www.thedeal.com/servlet/Satellite?pagename=NYT&c=TDDArticle&cid=1186574743494">According</a> to Trip Chowdhry, senior software analyst at Global Equities Research:</p><blockquote><p><em>The Redmond, Wash.-based software giant has 'been a total failure when it comes to virtualization'.</em></p></blockquote><p>Tell us what you really think, Trip. Sadly, that's accurate. </p><p>Meanwhile, EMC was busy buying a small software company. When asked about it now, they indicate that their go-in expectations were rather modest; They were just looking for a base hit. That company was VMware, acquired by EMC back in 2004 for $625M. On August 14th, 2007, following an IPO for VMware, EMC's remaining 85.6% stake was worth <strong>$16B</strong> (even more now btw, with total marketcap approaching $27B). And that's after already <a href="http://blogs.barrons.com/techtraderdaily/2007/07/27/cisco-takes-stake-in-vmware-intel-previously-took-stake-price-goes-up-ipo-pending/">receiving $218.5M and $150M from INTC and CSCO respectively</a> for a piece of the action. </p><p>In other words, for just $625M, EMC (primarily a hardware vendor) managed to buy a <em>software</em> company - a year after MSFT's entry into the segment - and still generate more shareholder value in just three years than MSFT (the world's largest software company) has generated <u>from all of its investments combined over the last decade, </u>with the possible exception of Server and Tools (although that's predates a decade). Oh, and did I mention that along the way VMware has been <strong>profitable</strong> (something this and other equivalent MSFT efforts almost never are) AND is the <strong>category leader</strong> despite MSFT's best efforts to unseat them in what even senior management concede is an increasing strategic area? <p>BTW, for more on VMware see here:</p><ul><li><a href="http://blogs.barrons.com/techtraderdaily/2007/08/14/vmware-emc-has-no-plans-to-sell-more-did-they-price-too-low/">VMware: EMC Has No Plans To Sell More; Did They Price Too Low?</a></li></ul><p>MSFT is a large company and it's reasonable to assume that some opportunities are too small to be pursued because they won't "move the needle" in a meaningful way. However, the current strategy of eschewing base hits for home runs clearly hasn't worked either. The latter have mostly turned into strikeouts, either clearly or soon-to-be. Meanwhile, a few decent base hits like VMware in MSFT supposed core area of expertise (software) -and a strategic one at that - could have put up numbers meaningful even to a company of its size. And in this case it's not like MSFT wasn't there early and spending equivalent amounts of money to succeed. They simply failed to focus, prioritize and win the game. Apparently it was more important to dream about other possible match-ups in different leagues entirely, and spend $20B+ to field new teams like Xbox, for example, only to now risk <a href="http://www.hunterstrat.com/news/2007/08/14/microsofts-robbie-bach-a-master-of-bad-timing/">"becoming a distant third in the battle for market share in the video game business"</a>. </p><p>The real shame - and waste - is that the internal virtualization team at MSFT probably contains many members who are just as pissed off and embarrassed by this lackluster performance. It's likely not lost on them that just up the road in Washington State, <a href="http://www.parallels.com/">Parallels</a> is generating more buzz vs VMware than MSFT. But they're likely hamstrung by the stifling bureaucracy that's telling us everything will be better if the game goes into extra innings. Server 2008 will come in to relieve, and brings new virtualization/hypervisor functionality. Well, not right away when Server ships mind you - whenever that ends up being. But 180 days later - or thereabouts. Because...well, you know. And "it'll be great" - or maybe just okay. Because...well, you know. That's what Ballmer said about Vista too and <a href="http://blogs.zdnet.com/microsoft/?p=660">look what happened</a>.</p><p>Meanwhile the stock continues to under perform. If you're keeping track, that's now under performance <u>versus all three major indexes</u> on an intraday, 5 day, 10 day, 1 month, 3 month, YTD, 1 year, 3 year, 5 year, and decade to date basis. Go figure. </p><p><strong></strong></p><p><strong>Update:</strong> (Related)</p><ul><li><a href="http://www.crn.com/software/201801821">Microsoft Plays Catch-Up In Server Virtualization</a></li></ul><p>As an aside, at what point can we hope for a management team that rather than cite their ability to come from behind as a badge of honor, will deal with the underlying reasons why they're always late to market - or at least slow out of the gate - and need three generations minimum before being competitive?</p><p><strong>Update #2:</strong> (Related)</p><ul><li><a href="http://blogs.barrons.com/techtraderdaily/2007/08/27/does-citrix-have-a-chance-against-vmware-in-virtualization/">Does Citrix Have A Chance Against VMware In Virtualization?</a></li></ul><p>Excerpt:</p><blockquote><p>Microsoft is far behind and everybody else, including XenSource, is a speck on the horizon.</p></blockquote><p><strong>Update #3:</strong> Some actual good news on the VM front:</p><ul><li><a href="http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9034818&intsrc=news_ts_head">How Virtual Machine Manager may help Microsoft compete with VMware</a></li></ul><p> </p>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com9tag:blogger.com,1999:blog-29195406.post-46253258684497815022007-08-10T13:11:00.001-07:002008-12-08T21:05:45.368-08:00Growth play, value play, or just lousy play?That's a question many are asking wrt MSFT. Before trying to answer it let's establish some basic facts, especially since MSFT's current management often work hard to ignore them when they're unflattering (<span style="color:#ff0000;">Warning: </span><span style="color:#000000;"><u>Long</u>. If you have a more limited attention span and accept a "fact", you can pretty much skip to the next</span>).<br /><br /><div><p><strong>1) Fact: Microsoft stock has performed abysmally over the past 5 years</strong> <p>I know, not exactly "news" if you've held this stock for more than a year or two. Still, given current management's refusal to acknowledge it and Ballmer's recent asinine comment that "<span style="color:#0000ff;">a lot has gone very well for shareholders over the past five years</span>", I feel compelled to state and support it.<br /><br />First, during Ballmer's reign as CEO, more shareholder value has been destroyed than was lost by Worldcom, Enron, Tyco and Lucent shareholders <em>combined</em>. <p>Second, for those who want to cut him some slack given the market meltdown in 2000/2001, let's look at performance since and relative to other industry players. One of my first <a href="http://msftextrememakeover.blogspot.com/2006/06/scoring-msft-against-its-own-self.html">posts</a> was a recap of a 2004 presentation by John Connors (then CFO of Microsoft). It showed MS's financial results relative to peers during the period 2001-2004. While there was some merit to that compare, it was undercut by the fact that MSFT, the stock, had under performed not one but <em>all</em> of those entities during that same period - a point I made at the time. Flash forward to 2007, and again management is trying to play the "fundamentals" card because the stock has continued to under perform all of these except Sony (note: this and subsequent compares are dividend excluded and use the recent fiscal year-end as the period close). I included a chart in my last <a href="http://msftextrememakeover.blogspot.com/2007/07/like-us-or-leave-us.html">post</a> which showed the past five years versus some of them. Since it's difficult to read, here's a breakdown that is complete and adds some additional peers/market indexes (note: data is for the past 5 fiscal years, %'s are approximate - I eyeballed them from the chart - and don't include dividends):</p><ul><li>MSFT <span style="color:#000000;">8%</span><br /><li><span style="color:#0000ff;">DELL</span> 10%<br /><li>INTC 22%<br /><li><span style="color:#0000ff;">IBM</span> 43%<br /><li>SPY 52% (S&P tracking stock)<br /><li>QQQQ 80% (NASDAQ tracking stock)<br /><li><span style="color:#0000ff;">NOK</span> 85%<br /><li><span style="color:#0000ff;">ORCL</span> 98%<br /><li><span style="color:#0000ff;">CSCO</span> 100%<br /><li><span style="color:#0000ff;">SAP</span> 119%<br /><li><span style="color:#0000ff;">SNE</span> -3% (SONY)<br /><li>CRM 170% (Salesforce.com)<br /><li>HPQ 175%<br /><li>YHOO 300%<br /><li>GOOG 380%<br /><li>AAPL 1200%<br /></li></ul><p>FYI, the ones in <span style="color:#0000ff;">blue</span> are the companies Microsoft originally chose to compare <em>themselves</em> to back in 2004, in what was already a self-serving list. If you add the peers that should have been included then and now - INTC, GOOG, AAPL, CRM, YHOO, the S&P, and NASDAQ - the under performance by MS is that much worse. <p>In other words, the truth is that things have gone very poorly for shareholders over the past 5+ years by the only measure that ultimately matters - stock performance. <p><strong>2) Fact: Investors have been more than patient</strong></p><p>Ballmer explicitly and implicitly stated at the recent FAM that investors have too short a time frame. He mentioned "three years" and suggested that more patience was required. As seen from the discussion above, three years came and went a long time ago. In fact, all "blue" names above except SNE have now outperformed MSFT over the past ten years (fiscal year-end close, dividends out). Ditto CRM, HPQ, YHOO, GOOG, and AAPL. If anything, investors have been too patient.</p><p><strong>3) Fact: Management's statements are at odds with observable facts and the stock's performance</strong></p><p>Publicly, management maintains that everything is going fantastically. They do this in many cases regardless of observable conflicting data. For example, "A lot has gone very well for shareholders over the past 5 years", while the stock has grossly under performed most peers and all three major indexes. "Vista is experiencing strong momentum", while the CEO of Acer <a href="http://www.physorg.com/news104405791.html">says</a> "the entire industry is disappointed" and MSFT substantially ratchets back previously forecast penetration rates for this year. "Microsoft has revamped its software development process", as yet another product - <a href="http://www.microsoft-watch.com/content/business_applications/mac_office_loses_its_mojo.html?kc=MWRSS02129TX1K0000535">Office for Mac, this time</a> - slips. Losing another ~$1.9B on Xbox is "actually quite different" from a unsuccessful year, and after investing over $20B since 2001 to generate $6B in cumulative losses with still no end in sight, "We're in a very good position on the fundamentals of that business". The inability to show normal returns from new investments within the "several year" time frames originally guided for, becomes "most of these decisions are not 15 percent IRRs that become 16 or 14. Most of them are winner-takes-all or extremely high net present value decisions if we are successful in the marketplace that we make.". Finally, $100B in buybacks and below-market dividends - over half of which went merely to reduce dilution caused by paying enormous sums to insiders - is "money returned to shareholders". </p><p>But let's pretend we're as stupid and gullible as management apparently thinks we are, and ask: </p><blockquote><p><em>Okay, if the company's current strategies are so good and you're tracking so well against them all, then how come the stock has done so badly, for so long, relative to the market and most peers and despite massive buybacks?</em></p></blockquote><p>That's one they're seemingly unable or unprepared to answer. Indeed, they want to ignore the stock completely - as they have for most years this decade. Or, as Liddell did at the recent FAM, suddenly agree the stock is important and claim success on the year, meanwhile ignore the fact that it came primarily as a rebound from a major sell off following <em>their</em> world-class screw-up the year previously. When challenged on that obvious lie of omission, they fall back to a two-year compare w/o noting that even that return represented under performance <em>versus all three major indexes</em>.<br /><br />Management want to fashion this debate as <em>our</em> - and the market's - lack of patience, versus <em>their</em> failure of leadership, strategy and execution. Well, at least publicly. Privately, of course, they lead the entire market in <a href="http://finance.yahoo.com/q/it?s=MSFT">insider selling</a>. They also ensured that <em>their</em> bonuses are no longer based on long-term options (that only had value if the stock rose), but rather on low-risk grants that now get handed out annually versus the previous three years (and vest from there). I guess patience is a one-way street.</p><p>John Dvorak sums up this conflict nicely here:</p><ul><li><a href="http://www.foxnews.com/story/0,2933,291777,00.html">Dvorak: Gates Era Coming to an End at Microsoft</a></li></ul><p>Especially in this passage and the several that follow it:</p><blockquote><p><em>Meanwhile, the company has to struggle with the reality that it cannot really do much right. This has to drive its people crazy. Okay, maybe not crazy, since boatloads of money are still flowing in, but it must be that because they know they can't do anything right.What I'm saying may be a stretch because it is possible — in some perverse dimension — that some people at Microsoft actually think they are doing things right.</em></p></blockquote><p><strong>4) Fact: The leadership team's actual track record of investments is decidedly mixed, if not in fact poor.</strong> <p>Again, let's suspend our mounting disbelief and ignore the observable conflicting data points. Overall, management's claim is that they are "investing for the future". The implication being that other companies aren't. Could that be it? Is Microsoft taking a long-term approach while others merely optimize for an often quarterly-focused market? Possible. In fact, it was this long-term approach that attracted me to the stock and kept me in it in the first place. Unfortunately, MSFT's rather anemic results (the slowest growth in their history as a public company two years ago) while others deliver superior revenue and earnings growth <em>year over year</em> (GOOG and AAPL in particular) - and MSFT desperately tries to catch up and emulate them - makes that assertion somewhat strained. It also belies the fact that all the massive investment done earlier, the so-called "emerging bets", were originally justified as being the "next sources of growth". Sadly, while they have helped revenue, collectively they have only <u>detracted</u> from earnings. Which is why as badly as MSFT stock has performed this decade, <em>the best analysts in the business</em> can only justify a 15%-20% upside from the recent - though now a memory - $30 level based on current guidance.</p><p>Rather than concentrate on fixing that, in part by better focusing, cutting expenses, and driving the bottom line, management denies any problems and is making new "investments". Again, these are being sold as the future growth areas for MSFT. In reality, they represent the areas that others pursued and proved to be more successful, sooner (to the point where some now potentially threaten MSFT's very future), while management was busy focusing on their still unproven "emerging bets". Leadership shrugs off this criticism even though they're <em>at least</em> guilty of badly blowing expected payoff time frames (remember Bach's "we don't invest in areas to go years w/o making a profit?", when asked about Xbox in 2001?). Instead, they point to Server and Tools as proof of their investing chops: "Go back 10 years and think about the Server and Tools business, which wasn't in existence to any great extent there, which is now one of our fundamentally biggest and most valuable business". Server and Tools <em>is</em> a huge success story. But what about Set-top, IPTV and MSN - all begun around the same time and representing some $15-20B of investment? Or, for a more recent example, how about that stupendous display of fiscal irresponsibility and lack of business judgement known as Xbox?</p><p>When "investments" don't make returns and are needed just to defend what you've got, they're called increased operating expenses and <u>shrinking margins</u>. Again, current management want to ignore the adverse impact on overall margins, even comically telling analysts that they should separate the company into core versus new. <p><strong>5) Fact: Management is arguing with the market and results, and shareholders are paying the freight for that hubris and failure</strong></p><p>For the past 5 years or so, Microsoft's leadership has been waging a battle with the market that they're still a growth stock and thus deserve a growth stock multiple (can spend and hire as they please, etc.). For most of that time, MSFT's results have made that statement laughable, which is why the P/E ratio has been <a href="http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=PriceRatios&Symbol=MSFT">deflating</a> (finding support around 20 these past few years) and shareholders have seen their equity destroyed. Now that revenue growth is back to double digits, management is once again beating the drums that they're a growth play. Since the corresponding earnings acceleration isn't there, they keep suggesting that it's "just a matter of time" - well, once they get past the current er... "investment mode". Unfortunately, the market has seen this movie before. They know MSFT has been in investment mode for most of the past decade and yet their business - and most of their profit - is still primarily dependent on PC sales, just like it always was. Only now, due to emerging markets, piracy, competition, uninspired products like Vista, etc, MSFT can rarely even match that overall growth rate. </p><p>Many investors would like to see MSFT admit that it's in a mature PC market and that its investments haven't radically altered that. While that doesn't mean they expect the company to give up on new ventures completely, it does mean they want to see the scope of their ambitions decreased and costs come down.</p><p>Brier Dudley has a good <a href="http://seattletimes.nwsource.com/html/businesstechnology/2003812169_brier30.html">piece</a> where Goldman analyst Sara Friar (who replaced MSFT perma-bull and perpetually wrong since 2001 Rick Sherlund) lays out that argument:</p><blockquote><p><em>One of the biggest frustrations I hear out there is why, in what has become a more mature industry, why are we still running the company like it's a start up or a young high-growth company because it's not.</em><br /><br /><p><em>That means in my mind you mature up the capital structure, take on some debt — you lower your cost of capital — you also could do a really substantial stock repurchase.</em></p></blockquote><p>Personally, while I believe that with the right leadership (strategies, focus, products, investments, execution, etc.), Microsoft could be a lot more successful, grow faster and deliver better revenue <strong>and earnings</strong> acceleration, it seems clear that the current leadership team has been unable to provide that despite an extensive period in which to demonstrate their ability. At the same time, for those who disagree with me and think MSFT is doomed to being a value play (if anything), it's clear that the management team is totally unprepared to run the company in that manner. In other words, whether you think the company is a "growth" play or a "value" play, it appears we have the wrong management team. Which is why MSFT has largely been shunned by both "growth" and "value" constituencies and the stock has been moribund. </p><p><strong>6) Fact: External shareholders are the majority owners of this company</strong></p><p>While Gates, Ballmer, and several other insiders (not to mention employees) hold a large amount of shares, the vast majority of MSFT - 80%+ - is held by external shareholders. So it's actually <em>our</em> company and the management team is meant to be working <em>for us. </em>Although<em> </em>listening to them, you get the sense that this is reversed and we're auditioning for the role of <a href="http://en.wikipedia.org/wiki/Bagholder">bagholder</a>.</p><p><strong>Conclusion</strong></p><p>Like most investors, you presumably have no interest in being a bagholder, nor did you take a vow of poverty or volunteer to lose money in order to ensure the future of Gates'/Ballmer's legacy. While <em>they</em> might have many reasons for doing the latter (now that they, their kids, their kids kids, etc. are taken care of regardless), I assume <em>you </em>are invested here to <u>make a reasonable return versus competing options</u>. If so, you have three choices: 1) Sell. 2) Continue to be patient and hope the management team eventually delivers the kind of results that will drive the stock. 3) Call for change. </p><p>If you've ruled out #1, then the obvious choice imo is #3. It's time for shareholders to understand that the problem is management's failure, not our lack of patience. Ample patience has been furnished already. Patience hasn't worked because leadership, strategies, priorities, execution, and accountability are flawed. The passage of time alone isn't going to fix that. Ask yourself this, is the company stronger now than when Ballmer took over? More respected by customers? More feared by competitors? Do the "trains run on time" better? Have the massively expensive "emerging bets" paid off? Are you more confident in the company's competitiveness and future? </p><p>For me, the answer to all of the above is a resounding "No". While there has been progress in some areas, the overall result in each category is a negative, and the stock reflects it. Therefore, Ballmer needs to go. A good deal of the senior management team who have contributed to this failure of strategy and execution, while feathering their own nests, also need to go. The Board, who in apparent contravention of their fiduciary responsibility have sat by while the company's execution has become a punch line and shareholders have been royally screwed over, need to join them. Then maybe, just maybe, this company can get back to basics, execute exceptionally well on that, and rebuild the customer enthusiasm and market confidence in management and their strategy/execution that imo has clearly been lost under the current regime. Until then, as it has for more than five years now, MSFT will remain neither a growth play or a value play - just a lousy play.</p><br /><p></p><p><strong>Update:</strong> Chart update (see previous discussion <a href="http://msftextrememakeover.blogspot.com/2007/06/what-will-microsoft-learn-from-iphone.html">here</a>):</p><br /><p><img id="BLOGGER_PHOTO_ID_5097504977000455138" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjD8Qgj0oKtnxcxRSjZxYGEjYO1cF8e0jhEUOURrThv0oYhBUeRvs2uAtcxE7DhYGhNbo4Mfwc_KCXftp4T7a0tUh0aoqHcL_94YkixEIlPWsBpuhcqYiWCvqHR2XBa4iA-kasF/s400/MSFT.jpg" border="0" /></p></div>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com14tag:blogger.com,1999:blog-29195406.post-56101314464448771832007-07-26T15:20:00.000-07:002008-12-08T21:05:45.847-08:00Like us, or leave usThat's the effective message Ballmer et al delivered at today's Financial Analyst Meeting. BTW, the market decided to go with the "leave us" option, although it's up a bit in after hours:<br /><br /><p><img id="BLOGGER_PHOTO_ID_5091667652588723042" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiouwtxPGNXJPGp78aG1J2kxP_eda5zbsfqfcsKhz8GysaNpLK7YsgdWYmPGrIIBQ0QKDXNOYk3fSWqZWiBKae_tzZJBuBdN9lVxm2xpqrz64fuihA68n3irFSl0NHFrATudqz1/s320/quote.bmp" border="0" /></p>Before you say, "But hey, the market was down too". It was. However, most stocks rally on presentations to the financial community. After all, the objective of the exercise is to provide that group with greater insight into management's thinking and strategy, thereby making them more confident, not less. I would also remind you that the exact same thing happened <a href="http://msftextrememakeover.blogspot.com/2006_07_01_archive.html">last year</a>. Finally, I would point out the large volume (~88M shares) and significant end of day selling (red):<br /><br /><p><img id="BLOGGER_PHOTO_ID_5091669026978257778" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglpyLxouhczFMa-vUDANdjHk1y9ddO0-rcKXT0dEoNKd5yjgbvnmZ4gd80PKNZwp2dY3z7XPY9wMiR6MFfEwOIxyeJ013DdWPrbRnsDjlmnS1NI4teYoSdCVWhKNsCie0MsviX/s320/vol.bmp" border="0" /> </p><p>I was originally going to cover the FAM in detail, but on reflection why bother? Most of it was the same tired, old, self-serving drivel we've heard before. And yet the current management team still thinks that maybe, just maybe, someone will buy it.<br /><br />The stupidity can be summed up in this statement by Ballmer, which came early in his speech:<br /><br /></p><blockquote>If you take a look over the last five years, a lot has gone very well from a shareholder perspective. </blockquote><p>He went on to discuss revenue and earnings growth over this <em>particular</em> time period, which of course avoids highlighting the rapid ramp in costs during the past three years (the period, incidentally, that he used when referring to shareholders with [implicitly] too short of an expectation time frame). While Ballmer deserves some kudos for top line growth and - much less so - bottom line earnings during this time frame, the ultimate test for investors is how the stock did. As per usual, Ballmer omitted that little gem. So let's fill in the missing data point: </p><p><img id="BLOGGER_PHOTO_ID_5091740241830992770" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisFMvZA9YaAUt4DiJmALp3GYffm8FbPnnQ-n8sXSI4ppCUiOCUx1oZnqGFaykW0eGy7rYZP_zBOprtXTVYbZesSc0zwDXqMGnluaI6867-5JCPygXP8jz1AT__68zFwGD52hoC/s400/5.jpg" border="0" /> </p><p>BTW, that's sans dividends. With dividends (including the one-time $3 fiasco), it would be another 14-15% higher. So call it just a <strong>60% under performance</strong> versus the NASDAQ (although the QQQQ's, for example, pay dividends as well). Maybe it did better versus its peers? Let's check:</p><img id="BLOGGER_PHOTO_ID_5091811834640849826" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-LZaYHG7dAHzWfRGuPZJwfdkcGoMOhaXkWZteocPGJc49bpCRay43GurJh0z8N_3_sFk48kE-KlkZOPMVrF2z-aZjg5ESZx9W34Q9fsVkj4CkecbVsOd1T0Zo1iaiSgw_cMKu/s400/comp.jpg" border="0" /><br /><p>Er, nope (that's MSFT at the very bottom btw). </p><p>It boggles the mind that the CEO of a company whose stock has chronically underperformed the index and its peers by that magnitude, and is currently trailing the NASDAQ by almost 7% YTD (in this its major product release year), can actually stand on stage in front of investors/analysts and claim that "a lot has gone very well from a shareholders perspective". Even more incredulous is that <em>not one of them</em> called "bullshit!".<br /><br />I'll at least give credit to CFO Liddell for doing what no senior MSFT executive has done in recent history, and that's <strong>mention the stock proactively:</strong> </p><blockquote>Probably of more interest at the end of the day is what that looked like from a shareholder point of view, and that translated into the total shareholder return of 28 percent for the year. </blockquote><p>Of course, it was also self-serving and primarily reflects how badly MSFT had crashed the year previously following Ballmer's now infamous spending surprise - a point that Liddell semi-acknowledged:</p><blockquote>And, obviously, some of you will say, Well, it was at a low point last year, I could have gone back two years, and it would have been around 25 percent.</blockquote><p>BTW, my math for the past two years - again, sans dividends - is more like 19% (~22% with). Unfortunately, having won some points by mentioning the stock, Liddell descends into the same self-serving nonsense as everyone else:</p><blockquote>But measure it however you like, last year was the best financial year from a shareholder perspective that we've had this decade, at 28 percent. </blockquote><p>Again, it's unbelievable to me that Liddell and others can brag about this with a straight face and no one challenges them on it. Seriously, the translation here is: "Forget the fact that this was in large part a <em>rebound</em> after crashing to <em>three-year lows</em> (following our gross incompetence in managing street expectations), that it came at the cost of another <strong>$27B</strong> of <strong>shareholder cash</strong> poured into a tender and buybacks, that it was helped by the hope that Vista was going to be a killer release (now <a href="http://www.physorg.com/news104405791.html">dashed</a> btw), and that it came after badly trailing all major indexes so far this decade (along with the largest destruction of shareholder value in corporate history). Isn't it great?". </p><p>That said, Liddell's speech is the only one I found any value in. It's worth a <a href="http://www.microsoft.com/msft/speech/FY07/LiddellFAM2007.mspx">read</a>. He also seemed to foreshadow some improvement in the dividend strategy (which has been a total mess so far). Although he still expressed a preference for buybacks vs dividends. Why, exactly, was left unsaid. Except, of course, that dividends actually go to shareholders, whereas buybacks can be claimed as "returned to shareholders" when in actuality a large part historically has gone to offsetting the dilution caused by paying insiders.<br /><br />Bottom line, unless shareholders finally push back and call for new management, expect the next five years to look like the last five - best case. While others are spending far less on R&D and reporting massive earnings upside:</p><ul><li><a href="http://www.forbes.com/feeds/ap/2007/07/25/ap3948721.html">Nintendo Profit Jumps Fivefold</a></li><li><a href="http://www.marketwatch.com/news/story/sony-profit-more-doubles-softer/story.aspx?guid=%7B0EA24E6F-CF18-405B-A9E6-005AB2533E60%7D&dist=hplatest">Sony's profit more than doubles, softer yen helps</a></li><li><a href="http://seattlepi.nwsource.com/business/325119_appleearns26.html">Strong sales push up Apple profit 73 percent</a></li></ul><p>MSFT management is calling for no earnings acceleration because they're going to keep spending ridiculous sums on suspect "big bets" and failed business models like Xbox, while continuing to under execute wrt delivering core products that actually thrill users and generate word-of-mouth buying excitement. As regards the stock, expect it to continue to under perform. After all, who wants a mature 8-10% grower that's still spending like it's a high-growth company - and rewarding its upper echelon accordingly - because its management is ineffective and in denial?<br /><br /><strong></strong><br /><strong>Update:</strong><br /><br />An interesting round up of analyst impressions coming out of the meeting: </p><ul><li><a href="http://blogs.barrons.com/techtraderdaily/2007/07/27/microsoft-becoming-an-infrastructure-provider-but-more-investment-needed-to-drive-services-analysts-conclude/">Microsoft Becoming an Infrastructure Provider, But More Investment Needed To Drive Services, Analysts Conclude</a></li></ul><p>I guess it must be some of the other institutions represented by the 100-odd professionals who follow the stock that are selling :-)</p>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com19tag:blogger.com,1999:blog-29195406.post-53284901380437326572007-07-19T08:43:00.000-07:002008-12-08T21:05:46.133-08:00Q4/07 EarningsI'm tied up today and don't expect to post much on earnings this time around. The Xbox charge will blow earnings for both the quarter and the year, so that pretty much negates any anticipation for a "blowout". That said, Ballmer's recent public comments have had a certain unmistakable <em>swagger</em>. So expect the rest of the business to have done quite well. No doubt the company - and analysts with buy recommendations and/or investment banking relationships - will do their best to present the results in that light. Specifically, look for numerous references to "excluding the charge, EPS would have been...". While there's some merit to that wrt understanding how the rest of the business did, the reality is that rightly or wrongly (it's clearly wrongly btw) Xbox <em>is</em> part of MSFT's overall business now. In fact it's a significant part, especially for top line revenue and revenue growth. So excluding that charge is a bit like saying "the date went really well except for the part where I got drunk, spilled a glass of red wine all over her new dress, and she slapped me in the face".<br /><br />The major focus, of course, will be on anything that gives a sense of how Vista is doing (answer: not nearly as well as it should be, all company rhetoric aside) and of course guidance for the year. Again, listening to the swagger coming out of Ballmer, Witts (who incidentally rivals Liddell for B-O-R-I-N-G) and others at the recent <a href="http://www.microsoft.com/presspass/events/wwpc/materials.mspx#transcripts">partner meeting</a>, they seem to be very optimistic about FY08 - at least for now. So I don't anticipate any negative change to previous guidance. There's even a chance they could raise it slightly.<br /><br />WRT the stock, it has suddenly reversed course and been surprising strong after tracking near perfectly against <a href="http://msftextrememakeover.blogspot.com/2007/06/what-will-microsoft-learn-from-iphone.html">my earlier $28's downside forecast</a>. Not sure what to make of that, except possibly that those comments coming out of the partner meeting caused the street to jump the gun and buy heading into earnings. Hopefully, there are enough positives on the conference call - or at least absence of negatives - that we avoid a post earnings selloff like INTC experienced. Of course, INTC had nicely outperformed the NASDAQ on the year heading into that, whereas MSFT - even given the recent strength, and in this, its major new product year - is still lagging it by more than 6%. So we'll see.<br /><br /><strong>Pre-earnings:</strong><br /><br /><ul><li><a href="http://www.bloomberg.com/apps/news?pid=20601103&sid=aF38gj9Ej3cE&refer=us">Microsoft Xbox Repairs May Cut Fourth-Quarter Gain (Update1)</a> <span style="color:#3366ff;">[</span><span style="color:#3366ff;">I like the "may" part]</span></li><li><a href="http://communities.canada.com/nationalpost/blogs/tradingdesk/archive/2007/07/18/microsoft-q4-earnings-preview-xbox-could-hit-revenue.aspx">Microsoft Q4 earnings preview, Xbox could hit revenue</a> <span style="color:#3366ff;">[ditto "could"; It's 7-8 cents after-tax people]</span></li><li><a href="http://seattletimes.nwsource.com/html/businesstechnology/2003795534_microsoft19.html">All eyes look to Vista as Microsoft reports</a></li><li><a href="http://blog.seattlepi.nwsource.com/microsoft/archives/118319.asp">Microsoft earnings today: Xbox 360, Windows Vista</a></li></ul><strong>Post-earnings and conference call:</strong><br /><br />So,<br /><br /><ul><li>PC growth was stronger than expected (by a full 1%)</li><li>Foreign exchange helped revenue (by a full 2%)</li><li>"Each business grew revenue at double-digit rates at the high-end of our guidance"</li><li>The Windows premium mix did better than expected (up 17% to 72%)</li><li>MBD revenue was up 19% versus guidance of 13-14%</li><li>Enterprise agreement renewals exceeded the historic range of 66-76%</li><li>Dynamics bookings were up 24% (not great vs Salesforce.com, but better than normal)</li><li>They sold 400K less Xbox consoles (thereby avoiding the loss per unit * 400K)</li><li>243M shares were bought back on the Q for $7B+ (thereby boosting EPS)</li><li>Headcount growth came in lighter than usual (again, should have helped income even though it's still excessive at ~10%)</li></ul>And...<br /><br /><p>MSFT only managed to <em>meet</em> street expectations on EPS. Huh? Hey, I only report the stuff. I guess Ballmer's swagger was reserved for top line results only - part of a disturbing trend. BTW, notice how the earnings "caption" always gives away the plot? Last Q, for example, when earnings for a beat were there, the caption was "Microsoft Reports Record Profits". This Q, when it's just a meet, the caption is "Microsoft's Annual Revenue Surpasses $50B". </p><p>To determine why EPS weren't higher I reviewed the financials. FWIW, the first thing I always do is take MSFT's efforts to make growth of revenue vs earnings less easy to compare, and rearrange it so that it's clear cut. That yields a table that looks like this: </p><p><img id="BLOGGER_PHOTO_ID_5089102853452721666" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-rZBFgLeLAFIndh_aFwI9Gnww-NLEKo_DblmQMM_GauRnApkisRl0uq58QPzzqqj4D7KXak2oRevfY0yhgKSY0_Gm7o9B5sX-HzX25U-F71GgcgGVV_I8GssU-I9501F3lu9V/s400/table.bmp" border="0" /> </p><p>At first glance - and ignoring the usual losers - the issue would appear to be Client (see red highlight). That failure of earnings growth to match revenue growth <em>is</em> a real concern. But it's been one for a while, and includes such macro items as an increasing percentage of sales coming from emerging markets (where Windows sells for less). Indeed, Client revenue growth (at least) was actually within forecast (14% vs guidance of 14-15%). It's actually Server & Tools that came in light on revenue versus guidance (15% vs the 16-17% forecast). Additionally, they only matched on earnings growth (versus exceeding it as they have on some previous occasions). According to Liddell, some of the top line issue may have been a result of stronger than expected EA renewals. Whether that played any part in the bottom line impact is unclear. Finally, you have MBD coming in way above plan on revenue (19% vs guidance of 13-14%), but only matching that growth on earnings (it too has done better than that in some previous quarters). Bottom line, who knows? It's a $100M-$300M earnings mystery wrapped in an enigma - or maybe I'm just too tired to analyze it further. On the all-important Vista issue, it's clear from comments that adoption is behind expectation. Liddell's actual euphemism was something along the lines of "we're broadly happy with Vista adoption". But in the Q&A, he was forced to concede that MSFT took down expectations for next year from 85% Vista/15% XP to just 78% Vista. What did Ballmer say again? Oh right, "Vista will be great - bet on it". He must have meant "eventually". Rounding things out we have the pre-announced Xbox loss, which came in at $.08 (the high end of the previously given range of course). That took total losses in E&D <em>for just the past two years</em> to a whopping $3.176B. Yup, that's a "strong business" alright. Finally, Online continues to be a financial sinkhole and will lose money again next year (Xbox business plan redux?). Forecast revenue growth of 10-13% for Online in FY08 is also a joke compared to GOOG, YHOO, or the market as a whole. </p><p>So overall, revenue came in roughly as I expected. However, bottom line results were weaker (I expected 1-2 cents upside). Guidance for next year is in line with what I anticipated (i.e. a slight increase), which ultimately is good. But the implicit confirmation about Vista sluggishness, combined with the lack of margin and earnings acceleration next year - and guidance to continue hemorrhaging in Online, will likely take the wind out of the sails of the extra bullishness that had been building following management's recent upbeat comments. Some analysts may still take their estimates up slightly following the call (assuming that MSFT was just being conservative as usual). But I doubt we'll see anything like what <a href="http://blogs.barrons.com/techtraderdaily/2007/07/19/ibm-a-big-day-for-big-blue/">followed</a> IBM's strong results. BTW, IBM stock has now handily outperformed MSFT over 1, 3, 5 and 10 years. So much for MSFT being the "new IBM" - we should be so lucky. </p><p>For its part, MSFT is down in AH trading. Although exactly how much is subject to some debate (NASDAQ reporting last trade @ $30.90, down .61 from the close; MSNmoney and YHOO say $30.83, down .68). It will likely open weak tomorrow as a result (despite the MM's best efforts). It could have been worse though. Just look at <a href="http://moneycentral.msn.com/detail/stock_quote?Symbol=goog">GOOG</a> in AH - down $39.06 according to MSNmoney (and it was down forty-something at one point). That should also hurt the market tomorrow. </p><p></p><p><strong>Update:</strong> </p><ul><li><a href="http://money.cnn.com/news/newsfeeds/articles/djf500/200707192220DOWJONESDJONLINE001208_FORTUNE5.htm">For Microsoft, Meeting Expectations Apparently Not Enough</a> </li></ul><blockquote>"For people who think Microsoft is still a growth story, it's disappointing. It's a mature company in a mature industry with declining prices," Chowdhry added. "For people who think Microsoft is a value company, what they delivered today was quite good."<br /></blockquote><p></p><p></p>MSFTextrememakeoverhttp://www.blogger.com/profile/07404568317468095371noreply@blogger.com8