Stock of the Day
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Microsoft (MSFT)
Why Microsoft Bombed its Earnings Report?
Boy, when does Steve Ballmer start feeling the heat? After the bell yesterday, Microsoft reported its first-full year of revenue decline in over two decades as a publicly traded company. Things were weak in all major divisions especially the Windows one (revenue down 29%). It's not too often that you see a major tech giant like MSFT miss analyst expectations for topline by more than a billion dollars. The stock dropped 7% after the report but then MSFT prevented things from getting real ugly by offering optimistic guidance during the conference call. The tone was very much along the lines of this is the worst that things are going to get and demand in the PC and server markets should pick up next year. Plus, MSFT is also trying to sell investors on Windows 7 and a new version of MS Office. Therefore, even though the stock is off about 10% this morning from yesterday's close, there is still some optimism in the air about the future at Redmond.
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| Stock Analysis |
No matter how you slice it, the revenue miss was massive, here is a detailed look at the numbers. The main takeaways are that every single unit, from the Client Division (that includes Windows) (annual sales down 22%) to the Server Division (which makes enterprise software) to the Xbox and Zune businesses, was significantly down. And yeah, the online business lost more this quarter ($732 million) than a year ago ($458 million). The $100 million marketing campaign for Bing could not have helped. However, MSFT did tighten up its belt and a reduction in expenses saw the company basically match analyst expectations for earnings -- 36 cents a share. That is fairly impressive considering sales were that far off.
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Analysts listening in on the conference call took solace in the fact that MSFT and CFO Chris Liddell seemed pretty optimistic about the future. MSFT believes the PC market is going to pick up soon and that the new operating system -- Windows 7 -- will spur that growth by encouraging people to go PC shopping. That is placing a hell of a lot of pressure on 7. It is a better product than Vista but not a radical enough improvement over it or even over XP to really excite users. Also, the draw of an operating system is on the decline, yes, you need one, but you don't always need the latest and greatest one because so much of the PC experience is now online. This is not an endorsement of Chrome, Windows will hold on to the bulk of its market share even after Chrome launches but the days when a new Windows version would lead to a substantial increase in PC sales are gone. Research firm Gartner agrees.
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Steve Ballmer better hope this poll doesn't reflect the opinions of the majority of MSFT shareholders. His track record is not one of a true tech visionary -- in fact, you could make some serious money taking the other side of his prognostications. Here is additional proof. Investors have a right to question why a guy running what is supposed to be the most innovative tech company in the world can't predict with at least some sort of accuracy what is going to be the next big thing in tech. He missed the boat on Google and search (here is a great history lesson on that) and now is spending a lot of shareholder money to play a game he has very little chance of winning.
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If you are still interested, the MSFT-Yahoo talks have picked up again. This time, they are not talking about a full scale acquisition but basically a deal where Microsoft would sell the ads next to Yahoo's search results. Apparently, the Yahoo board met yesterday to discuss details. Some sort of a deal will probably happen but the impact of it will be limited if G still has the bulk of the search traffic.
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Over the longer term, Microsoft has to get away from its reliance on Windows upgrade cycles, and boost its offering of online versions of core products. Making Office 2010 available online is a good start but more has to be done. Sure, there is a lot of hype behind the Software as a Service (SaaS) business model but the success of companies such as SalesForce.com has proven that there is indeed more substance there than MSFT has acknowledged upto this point.
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