Don't Be Confused About Microsoft: The News Is Bad
So now the world knows Microsoft's (MSFT) quarterly results. And they were unimpressive for the greatest growth stock in history run by the richest man in the world. Revenues were flat. Operating earnings were down. Earnings per share met analysts' already lowered expectations.
Microsoft's sluggish numbers left investors decidedly downcast. After a brief pop in after market trading Tuesday evening, the stock slumped badly Wednesday and closed down 5 3/8, or 6.9%, at 73 1/8. Analysts at Prudential Securities and SG Cowen downgraded the stock from a buy to a hold. Other analysts held their buy recommendations but reduced their published estimates for growth in revenues, operating income and earnings per share (excluding investment gains).
Let's sift through the dross.
Revenues for the quarter were $5.8 billion, 1% higher than a year ago and 3% higher than last quarter. That is the kind of growth rate one would expect from a cigarette company. (In fact, Philip Morris (MO) yesterday reported better revenue growth numbers than Microsoft!)In its conference call with analysts last night, Microsoft executives had various explanations for the anemic performance. Year-over-year revenue comparisons, they argued, were so weak because last year's quarter had been unusually good. There was, however, no explaining away the weak quarter-to-quarter results. Companies are not buying PCs loaded with Microsoft software as quickly as before. Intel chips for high-end computers have been in short supply. Windows 2000 has not been quickly embraced by corporate users. Operating earnings excluding investment gains were $3 billion, 22% lower on a year-over-year basis and 6% worse than the prior quarter. The company's operating margin -- operating income as a percentage of revenues -- declined to 45.3%. That is thinner than at any time since late 1997 because marketing and research and development expenses surged. The cause? The shift in demand towards consumer machines vs. corporate PCs, which are much more profitable to Microsoft because they tend to be loaded with Office 2000 and the higher priced Windows 2000. Reported earnings per share were 36 cents, down 7% from the year before and off 5% from the previous quarter. The company was only able to meet analysts' expectations by including about $650 million of investment gains. Perhaps most worrisome is the drip, drip, drip erosion in the past 18 months of the company's return on equity and return on assets. ROE fell to about 27% from 36%. ROA dropped to 22% from 27%.
|Don't Worry, Bill's Still Rich |
Microsoft vs. the Nasdaq Composite Index, Wednesday
- One, the core PC-based business is vulnerable. (Windows products account for 40% of revenues, which is just about what they were in 1998.) Its new Windows 2000 product line has yet to catch on. There is no way to get around the fact that Microsoft's profits key off PC growth, which is unlikely to recover to rates reached last century -- i.e., in the 1990s. Whatever the future holds for Microsoft, we will have to wait until late in the year to find out whether Microsoft's core corporate PC business has picked up. (Companies tend not to buy PCs so much in the summer.) Two, the company is still struggling to segue from the old PC-based computing world to an Internet-based one. The company finally presented the general outline of an Internet strategy in June, but that is about it right now. Whether it can dominate the markets for Internet-based software is truly unclear. Those neighborhoods are already claimed by formidable competitors like Oracle (ORCL) and Sun Microsystems (SUNW).
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