Adam Lashinsky
The most salient question from a Wall Street analyst during Microsoft's(MSFT Quote - Cramer on MSFT - Stock Picks) hastily arranged teleconference Thursday afternoon came from William Epifanio, the New York-based software analyst for J.P. Morgan.
If you're only now beginning to see a worldwide economic slowdown, and if so far your downward financial revisions are based mostly on weakness in desktop applications (software programs corporations buy for their PCs) and consumer businesses (like the MSN Internet service), isn't it likely there are more downward revisions to come? "This is our best effort and our best forecast for the moment," said a suddenly subdued John Connors, who never got his honeymoon period as Microsoft's CFO, having risen to the post a year ago. "It's hard to predict the extent of the economic slowdown." Translation: We all knew things were bad after warning or disappointments (or both) from the likes of Intel(INTC Quote - Cramer on INTC - Stock Picks), Compaq(CPQ Quote - Cramer on CPQ - Stock Picks), Gateway(GTW Quote - Cramer on GTW - Stock Picks), Apple(AAPL Quote - Cramer on AAPL - Stock Picks), Dell(DELL Quote - Cramer on DELL - Stock Picks) and others. Now we've found out there's something we don't know: how bad it's going to get. To repeat, Microsoft blamed its earnings and revenue shortfall on two segments, desktop applications and consumer products. The desktop applications part was weird because Microsoft didn't flag its desktop "platform" sales, which are twice as big as applications. One would think they'd go hand-in-hand, but the applications slowdown specifically speaks to the weakness in corporate spending because consumers typically just take what comes with the package. Oracle(ORCL Quote - Cramer on ORCL - Stock Picks) offered a conflicting picture on corporate spending by reporting a blowout quarter simultaneously with Microsoft's warning. But Mr. Softee (how apt the moniker suddenly seems) is a better gauge on the overall economy than Oracle. The former sells to absolutely everyone; the latter focuses on bigger companies that can afford its big-ticket software. Regarding its consumer segment, Microsoft gave no supporting data, but said it is experiencing weakness in subscription and online advertising sales in its consumer unit, largely made up of its MSN Internet business. Microsoft's consumer software, services and devices business is a relative pimple for the software giant. Its revenues were $479 million in the September quarter, about 8% of the total. But it's an unprofitable pimple for Microsoft, and everyone from America Online(AOL Quote - Cramer on AOL - Stock Picks) (and its soon-to-be-acquired magazine properties) to Yahoo!(YHOO Quote - Cramer on YHOO - Stock Picks) and the dead-tree media companies (we can still call them that) should be very afraid when Microsoft's aggressive sales force can't push ads due to the general economic climate. There's more evidence the Microsoft shortfall gets worse before it gets better. Microsoft held steady on its guidance that it will record $800 million in investment and interest gains for the December quarter. And Connors points out that interest and other income accounts for most of the gains, meaning that Microsoft isn't relying on stock-market killings to make this number. But this becomes a flimsier and flimsier proposition. Microsoft's investment and interest income has increased from $703 million in fiscal 1998 to $1.8 billion in 1999 and $3.2 billion in 2000. What are the odds the software company can't top that figure this fiscal year? A word on valuation. At Microsoft's new earnings forecast of $1.80 to $1.82 per share for the fiscal year ending in June 2001 -- down from the former consensus of $1.90 -- the company's shares are worth about 30 times forward earnings. That for a company with 6% projected year-over-year earnings growth. Ouch. Finally, where are Steve Ballmer and Bill Gates? Microsoft's CFO is qualified to answer questions, but I wonder if the company realizes that with the investing public listening in on its accessible Webcasts, the public would like to be reassured by the CEO or the chairman, two of the most visible faces of this company. Because as it stands, Microsoft's not reassuring anyone.
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