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Stock of the Day
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Microsoft (MSFT)
Not Blown Away By Microsoft and Ballmer - Here is Why
Suddenly, Wall Street is in love with Microsoft again. Gone are the complaints regarding a high-profile operating system that was seemingly universally panned, the search business which loses just about the same amount of money that it makes each quarter etc. The stock is up close to 10% this morning thanks to the optimism surround yesterday's launch of Windows 7 and today's earnings report, which really was not that impressive except for the fact that it beat reduced analyst expectations largely on the back of cost-cutting. Things were not as bad at Redmond a few months as everybody would have you believe and things are not as good as today's rosy stock performance indicates.
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As the recession has dragged on, a couple of factors have helped companies beat earnings estimates with more regularity -- a) analyst estimates are revised lower and lower to account for the depressed market and b) it is easier for companies to cut costs, e.g. layoffs and other cost-cutting measures face less opposition internally as employees come to grips with the tough environment, executives look harder under every nook and corner to find savings. Microsoft certainly has benefited from these circumstances. It had its first round of layoffs ever in January of 2009 as 5,000 people were told they would lose their jobs over the coming 18 months. On today's conference call to discuss earnings, MSFT said headcount was down 4% and operating expenses for the full year were going to be reduced by another $400 million. Overall revenue for the quarter came in at $12.92 billion (down 14%, the street was expecting $12.37 billion) and earnings came in at $3.57 billion or 40 cents a share (down from 48 cents a year earlier, the street was expecting 32 cents).
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So give Microsoft and Steve Ballmer credit for trimming excess fat off the business and performing relatively well in a recessionary economy. Traders are definitely doing that right now, buoyed in part by comments from MSFT that pre-release sales of Windows 7 are very strong. The server & tools division and the entertainment unit (which houses the Xbox gaming console that continues to sell well) also performed well this quarter with both holding steady on the revenue front.
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But before we fall deeply back in love with MSFT, keep this in mind. Windows 7 is still largely an unproven commodity. Most of the early reviews have been favorable and MSFT has corrected some of the Vista mistakes (they have also done a great job on the PR front with 7, as perception is shaping reality at this point, e.g. if everybody has good things to say about 7, how can it be bad?) but the real test comes when 7 starts to gain mass adoption and the people operating it are regular users not tech savvy beta testers. Vista had a lot of compatibility problems, 7 supposedly is much more compatible with peripheral hardware but how can you know for sure until the product has been exposed to millions and millions of users, each with a somewhat unique hardware and software setup? Plus, 7 is not really that different from Vista. Vista wasn't as bad as people claimed (there is an easy way to turn off those annoying security messages in Vista if you look around for a couple of minutes). 7 has fixed the obvious problems with Vista but not much more. On the positive side, there is some pent-up demand given that most people hold off on computer purchases up until a new operating system release.
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The fact that there isn't anything revolutionary in Windows 7 speaks to a larger problem - the operating system is no longer an area of innovation, the web is and Microsoft doesn't have dominance there. Can you imagine using an internet application that was created and conceived during the turn of the century 10 years ago and still be perfectly happy with it (as most people are with XP)? No, because constant innovation on the online platform makes applications age a lot faster. That is clearly not happening with operating systems which means Microsoft's traditional business of relying on upgrade cycles to drive Windows revenue is going to continue to weaken. That combined with the weak search business indicates that the structural problems with Microsoft are not going away anytime soon.
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Steve Ballmer's Windows 7 dance party -- Vista you say? We don't know what that is.
Microsoft Wows the Street - Some more color and details on the numbers. The word ‘blockbuster' is being thrown about a lot.
Burger King Japan selling Windows 7 burgers -- Some very creative thinking out of Redmond.
Other stuff making news
Nokia sues Apple in patent dispute -- Nokia wants in on the iPhone party.
Amazon Reports Strong Earnings -- The price war with Wal-Mart hasn't hit the bottom line yet.
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Profile |
Click here to view a detailed profile of Microsoft.
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