Friday, April 25, 2008

Mixed quarterly report from Microsoft

An article on MarketWatch by John Letzing and Dan Gallagher entitled "Microsoft shares fall as core business weakens - Third-quarter results show weakness in Windows, Office franchises" is actually a fairly balanced summary of the quarterly results from Microsoft, although the headline does not completely match the actual story and actual results. The bottom line is that revenue was a little light, coming in at $14.45 billion, $120 million less than the $14.57 billion that analysts had forecast. Earnings were actually ahead of analyst estimates.

The only other significant piece of bad news was that guidance on earnings for the current quarter are somewhat below analyst estimates, at between 45 and 48 cents versus 48 cents for the analyst estimates. But, the revenue guidance of between $15.5 billion and $15.8 billion is actually modestly ahead of the analyst estimate of $15.5 billion. So, we have the classic mixed bag.

Other good news is that fiscal year 2009 guidance of revenue between $66.9 billion and $68 billion and earning between $2.13 and $2.19 a share. I believe that is a bit ahead of the analyst estimate.

Business is booming in emerging markets, but prices there tend to be somewhat lower and there is more piracy. The company admitted that they had a "setback" on the piracy front this quarter. Meanwhile, Microsoft is a little more sensitive to the overall U.S. macro economy and demand is a little lighter here in the U.S.

There is the Vista versus XP debate lurking in the background, which does put a little downwards pressure on results, but these latest results (a $120 million revenue shortfall) do not indicate a major problem, and it is more of a short-term issue anyway.

As far as so-called weakness in the Office franchise, the article actually explains that Microsoft's business division is actually doing better, once you remove an accounting adjustment from a year ago:

Microsoft's business division, which includes its Office software suite, also saw revenue fall in the quarter, to $4.75 billion from $4.83 billion. Taking the deferral from the year-earlier period into account, though, the business division actually saw 9% revenue growth.

Everybody focuses on their favorite subset of numbers. Short-term traders and speculators will do what they always do. Given that they pushed Microsoft up sharply over the past week, the decline today looks like a classic "Buy the rumor, sell the news." A hint of negative news only accelerated that movement. One analyst suggested that people were expecting a "blowout" after Intel, so merely having a decent report was simply not good enough.

The $64 billion question now is how true investors (e.g., mutual fund managers) view the results and whether they are inclined to retain or lighten their holdings. It will take a couple of weeks to filter out the short-term "action" from longer-term fund positioning.

-- Jack Krupansky

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