Microsoft Shares Turn Sour
SAN FRANCISCO -- Investors expecting more out of Microsoft's (MSFT) - Get Report third-quarter performance registered their disappointment Friday.
At $29.80 in recent trading, down $2, or 6.3%, the stock was trading at 14 times the company's 2009 projection midpoint for EPS of $2.16. That's a value discrepancy when compared with the median of 18 times for the rest of the software sector, according to Goldman Sachs analyst Sarah Friar.
One of Microsoft's chief competitors,
Oracle
(ORCL) - Get Report
, was also down 2.5% Friday. At $21.42, Oracle was trading at 15 times 2009 projected EPS. But on-demand software leader
Salesforce.com
(CRM) - Get Report
, which serves a market that Microsoft is going after with its full release to market this week of CRM Online, was trading Friday at $67.83, or 200 times forward earnings.
Microsoft said Thursday that it had
of 30.4% for the third fiscal quarter, or 40.3% excluding a $1.4 billion fine levied in February by the European Commission. That's a 50-basis-point improvement over the same quarter of last year, when operating margin was 39.8%, using Microsoft's 2007 figures normalized for the recognition of deferred revenue on technology guarantees and pre-shipments of Vista and Office 2007.
But for fiscal 2009, Microsoft CFO Chris Liddell projected operating income margin to remain generally flat year-on-year, factoring in additional expenses of about $500 million from two recent acquisitions.
The company faltered on emerging-market piracy during the third quarter, after progress combating it in previous quarters. Executives on the conference call attributed reduced client software revenue, in part, to an increase in the number of unlicensed Windows operating systems shipped in Asia.
"Individual enforcement actions make a big difference in any one quarter," Liddell said. Microsoft's PC operating system shipment growth was between 8% and 10% for the quarter, which trailed the PC industry's reported unit shipment growth rate of 14.6%. Piracy became a negative factor. "In this particular quarter, a couple of distributors had a particularly high distribution of unlicensed PCs in China due to some market conditions there," Liddell said. And it gets progressively harder, he added.
"Piracy is a tough battle in an area where we will need to continue investing to make progress," investor relations manager Colleen Healy said.
The Xbox 360 console and games revenue saved the quarter, growing 68% to $1.6 billion, which was $300 million above the company's guidance.
But Xbox sales helped to drive expenses, as well. The cost of revenue increased by $370 million to $2.5 billion, due to higher console sales, growth in Microsoft's consulting business and expansion of data center operations and costs from the acquisition of aQuantive, Liddell said.
Overall operating expenses grew 11% or $600 million, to $10 billion, excluding the $1.4 billion fine and $150 million in other legal charges in the prior year.
Microsoft's 2009 forecast for PC-unit shipment growth of 11% to 13% is above the 10.6% growth previously projected by analysts.
Microsoft's forecast suggests a tighter focus on costs, Friar wrote in a note Friday. "We believe Microsoft is currently well positioned to weather a macro downturn," with Windows Vista, Server 2008 and Office 2007 still in fairly early stages. Microsoft is an investment banking client of the firm.
Friar wrote that she expects the strength in games sales to continue into the fourth quarter, given the launch next week of the latest version of
Grand Theft Auto
.
And currency benefits should contribute 300 basis points to growth in the final fiscal quarter, Friar wrote.