won a victory Thursday when the
U.S. Court of Appeals for the District of Columbia
ruled that it won't have to split into two separate companies and didn't engage in monopolistic practices in the Internet browser market.
Appeals Court Overturns Microsoft Breakup Decision
Cramer: Yet Another Reason to Buy Microsoft (premium content)
Appeals Court Ruling for Microsoft Sets Up Likely Settlement
Microsoft Ruling Gives Market a Needed Shot of Adrenaline
Microsoft Call Options Flying Just Prior to Appeals Court Ruling
Fund World's Ruling on Microsoft Is Less Rosy
Had the lower district court's ruling been upheld, it could have seriously impeded the introduction of Microsoft's forthcoming operating system, XP, which will include applications for music, video, instant messaging and Internet telephony, says Greg Vogel, senior research analyst and managing director at
Banc of America Securities
. The splitting of the operating systems and applications divisions of the company would also have stymied the creativity of Microsoft's application developers, Vogel adds. However, he doesn't think the court's decision will directly affect sales or Microsoft's stock.
TSC: How great of a victory is this decision for Microsoft?
The fact that the company isn't going to be broken up is positive in the near term. But just as important is the fact that Microsoft will be allowed to continue to innovate with its products and add functionality. That's pretty critical to the long-term survival of the company. For a technology company to succeed, it has to be able to add new functionality and new capabilities. So, it's very important, and it's also very important to the release of Windows XP, which will come out in the fall.
TSC: On the other hand, the court also upheld the earlier ruling that Microsoft illegally defended its Windows operating-system monopoly and is sending that ruling back down to a lower court. What does that mean for the company?
Recent Daily Interviews
One Group Small Cap Value's
The court has upheld the finding that the company is a monopoly and has illegally maintained its monopoly, but has centered that argument around negotiations with the OEMs
original equipment manufacturers and Microsoft precluding them from being able to ship other kinds of browsers with the operating system when somebody buys a PC.
Basically what the court did was remand back to a lower court the process of trying to find a resolution and to show that Microsoft will take steps to make sure that this doesn't happen again. So, instead of a structural remedy of breaking the company apart, they have to justify some other type of remedy. They could go back to the original solution of breaking the company apart, but more likely, it's going to be a remedy that affects directly the illegal practices of the company of forcing the hand of the OEMs.
TSC: What would have been the consequences for Microsoft if the court had ordered it to break up into two divisions, one for applications and one for operating systems?
It would have been very problematic. Microsoft would have been organized into two separate companies that no longer have the advantage of being able to leverage each other. As it stands right now, some of the strength of Microsoft's applications come from the fact that they are able to work very closely with the developers of the operating system in creating very compelling applications, and that's a real advantage for the company.
TSC: What kind of an impact will the court's decision have on the stock?
It's going to be very positive for investor sentiment. Investors have been concerned about some of the legal issues. Although the legal issues are by no means behind Microsoft, there's much less uncertainty than there was previously, and so from that standpoint it is positive.
The concern we have longer term is the fundamentals are really unchanged, and while this doesn't negatively impact the company, it's not going to help Microsoft sell more software, which is ultimately what is going to drive the stock price. So, it's positive from a sentiment standpoint, but it doesn't change our forecast going forward.
TSC: What does the court's decision mean for AOL Time Warner (AOL) ?
It means that AOL isn't going to get any relief from competition with Microsoft from the courts. So it doesn't change AOL's business in any way, but it means they are going to have to continue to work with or compete with Microsoft as they have in the past and Microsoft is going to be a difficult competitor.
The one potential positive for AOL out of all of this is that because the court did affirm that Microsoft has acted illegally in its contracts with OEMs, OEMs may be more free now to work with AOL and bundle America Online software into the PCs that they are selling, whereas Microsoft has precluded that in the past by having their contracts state that OEMs could not make changes to its operating system. That's likely to change.
TSC: What is your outlook for Microsoft?
We are looking for revenue for fiscal 2001 ending in June to be about $25 billion. That represents 10% revenue growth over last year's results. And we are expecting earnings this quarter to come out at 41 cents and for the full year to be $1.72, and that represents 5% year-over-year earnings growth, which is significantly below the growth rates that the company has experienced in the past.
It's a tougher environment for everybody. Microsoft is no exception, so the growth is fairly low this year, but there is some expectation that it will accelerate next year. We're forecasting revenue growth of 13% and earnings growth of 9% next year. With the stock trading around 45 times earnings, we think the stock is probably fully valued at this point.