Be careful what you wish for. You might get it.
CEO Steve Ballmer wanted Wall Street to ratchet down its revenue expectations for Vista, the new version of Windows. So in an unusual midquarter analyst meeting Thursday, he told investors that some projections for the operating system were "overly aggressive."
Wall Street took his comments to heart and promptly knocked more than 2% off the value of Microsoft's shares (and a cool $7 billion in market cap), the biggest one-day drop in about nine months.
Scott Kessler, head of technology-sector equity research at Standard & Poor's, says "investors were leaning the wrong way. Some were thinking that the company wouldn't call an analyst meeting unless it had good news."
True enough. But other investors feared that Microsoft was going to say that operating expenses for fiscal 2008 were going to soar. Mister Softee shocked investors last July when it announced that spending in fiscal 2007 would increase by a staggering $2.7 billion, largely in pursuit of Internet-related business.
That didn't happen on Thursday. Instead, Ballmer said growth in operating expenses will slow in 2008, but not dramatically.
It's important to note that Microsoft didn't modify its existing guidance for the March quarter and won't give guidance for fiscal 2008 until the April earnings call.
But despite the CEO's carefully chosen words, some analysts thought he muddied the picture. "Ballmer did a poor job of communicating realistic expectations about Vista growth," wrote Credit Suisse analyst Jason Maynard. "He suggested that a few sell-side models were too aggressive on this front. Unfortunately, the message came across to many that Ballmer was trying to talk down consensus Vista revenue estimates, rather than just a few outliers." Credit Suisse has an investment-banking relationship with Microsoft.
Part of the problem is that Microsoft has a huge number of moving parts. Consider the issue of PC growth. Ballmer indicated that Vista will not grow faster than PC shipments grow, in part because the fastest-growing markets -- the so-called BRIC countries of Brazil, Russia, India and China -- are also the areas most prone to software piracy.
On the other hand, Vista and Office are harder to pirate than previous versions of the software, and Ballmer figures that could help revenue growth. How much it will help? It's too soon to know, he says.
It's not surprising that investors are engaging in the kind of tea-leaf-reading that used to follow pronouncements from the Kremlin. "Ballmer did say that he didn't think that there was a big disconnect between Street estimates and what company management views as reasonable," wrote Sanford Bernstein analyst Charles Di Bona.
"While some are interpreting this as a statement that there is some issue with consensus estimates,
we would take Ballmer literally and note that the absence of a 'major disconnect' does not logically necessitate that there is a minor one
Emphasis in original. Sanford Bernstein does not have an investment-banking relationship with Microsoft.
I guess that's one way to look at it. But if I had skin in this game, I'd wait for the April earnings call rather than trying to read Steve Ballmer's mind or parse his prose.
Salesforce's Moment of Truth
With shares up 30% in the last three months, is
ready to take a breather? We'll know next week.
Wall Street has been buzzing with rumors that the provider of on-demand software had a blowout January quarter. But expectations have set the bar for the fourth-quarter earnings call very high.
Citi analyst Brent Thill raised his target price to $60 from $44 this week, saying the fourth quarter "was very strong, driven by enterprise customer momentum."
The company's ability to penetrate top-tier businesses has always been something of a question mark, though recent wins at
, where Salesforce grabbed 15,000 seats, and at
where Salesforce doubled its presence, have blunted some of that criticism.
That kind of news, of course, can be something of a double-edged sword, notes Thill. "Expectations have clearly risen, possibly to lofty levels, and if earnings results on Feb, 21 don't meet the high bar, the stock could sell off," he wrote in a research note. Citi does not have an investment-banking relationship with Salesforce.com.
Cowen analyst Peter Goldmacher is quite bullish on the stock and on the quarter, saying: "I think the quarter will be better than most people think, and I think most people think it's going to be pretty good. The subscriber count is going to blow through expectations on the back of some really big deals at Dell,
However, he added in an interview that "Some of the larger deals were done at significant discounts, and by significant I mean 70%-plus discounts." Cowen does not have an investment-banking relationship with Salesforce.com.
Wall Street is expecting Salesforce to earn 7 cents a share on revenue of $142.9 million.