When I added Microsoft (MSFT) to Jubak’s Picks on July 24, 2009 after the company announced results for its fiscal fourth quarter, I wrote “This is as bad as it gets.”
After its October 23 earnings release the company is now saying the same thing. In the post-earnings conference call Microsoft CFO Chris Liddell said that the fourth quarter may have been the bottom. Certainly the company is behaving as if it were: Microsoft resumed buying back shares in the quarter that ended in September with purchases of 1.4 billion shares.
First quarter earnings for fiscal 2010 fell to 40 cents a share, but that beat the 32 cents expected by Wall Street. Revenue declined by 14% from the first quarter of fiscal 2009 to $12.92 billion. That big drop in revenue came because Microsoft deferred $1.47 billion in revenue from customers upgrading to Windows 7. Put that back in and revenue came to $14.39 billion, a 4% decline from the year earlier period.
Microsoft beat Wall Street estimates this quarter by cutting costs by more than Wall Street expected. Operating costs dropped 6.9% after the company made its first ever company-wide firings, slashed travel costs and cut the prices it pays vendors. In the conference call the company increased its cost-cutting target.
The big question going forward, however, isn’t about cutting costs but about how many copies of the new Windows 7 operating system Microsoft can sell. Here too the news was good.
Deferred revenue came in above analyst expectations because pre-orders of Windows 7, which officially went on sale on October 22, were higher than projected. The company sold more copies of Windows in the quarter than in any other previous quarter with sales fueled by demand for Windows 7 and by sales to netbook makers of copies of the older Windows XP operating system.
In the conference call Microsoft said that it sees the potential for a corporate PC “refresh” beginning in calendar 2010 but expects companies to stretch out their replacement of older PCs (and older operating systems from Microsoft) over a couple of years.
Microsoft also backed up numbers from Intel (INTC) signaling that the PC market could actually show growth of 0% to 2% in calendar 2009. Earlier in the year market analysts had projected that PC sales would decline again this year. (For another way to play the upturn in PC sales, see my recent buy of Taiwan Semiconductor (TSM) https://jubakpicks.com/2009/10/20/buy-taiwan-semiconductor-tsm/ )
As of October 23, I’m increasing my target price for Microsoft to $33 by June 2010 from the prior $31 a share.
Full disclosure: I own shares of Microsoft in my personal account.
I ,as most readers. am very disappointed by MSFT service, and I’m fun of Google and Cisco which I prefer.
However, it should be considered two things. First, the enterprise customers who are waiting to update their old computer platform based. I see that everyday in my job where hundreds of companies are just waiting to update to 7.0 because they did not buy Vista. That it’s a big chunk of new computers even if some decide to use other options that are still minuscule. Just try to convince your CIO (chief information officer) to use Linux desktop or Macintosh for your new platform and wait for the answer.
Though there are options the main driver as usual is the Office suite and now Sharepoint. Too long to explain here, but Sharepoint is becoming a driver for big customers and there’s nothing around opensource/close source to compete successfully with this product (yes, a few but with limited feature set).
Second, though other services do not generate the kind of cash flow that Office and Windows provide, Microsoft still dominate or is second in other areas such as video gaming, search engine and … mobile OS.
Any minor improvement in search engine market share will mean millions in the cash flow that Google has now for itself.
In the case of mobile OS, there is a revamped version in the works to be launch on 2010 that will attract the usual enterprise customers despite the increased competition from Android (google), Apple and Research in Motion.
So, yes there is a big question mark on how many will update to 7.0 but no doubt that Apple and different linux flavors will fill just a few percentage points in that huge market still owned by Microsoft.
(I don’t own MSFT)
For me, the final straw has been the abandonment of the financial services they offered on MSN Money. In particular deemphasis and outsourcing (or dropping altogether) to free-lance status of their serious journalists (Jubak, Markman, Middleton, Domesh). It seems the only want the lowest-common-denominator users who want to clip coupons, and build their credit scores above 300 whilst minding their “emergency funds”.
Even more egregious is the termination of the advanced toolbox, especially their screener. Without those services there is little reason for me to use the site. Since the advanced toolbox only worked with Windows and IE, I needed a Windows operating system. No more. My next machine will be either a Mac or a Linux-based machine.
I started with an Osbourne running CPM, went to MSDOS, then a slew of Windows (3.1, 3.3, 98, Millennium, and now XP) — enough is enough.
So far I admit defeat on MSFT as a stock over the last few weeks. I don’t think it is a buy anywhere north of $22-23 but obviously plenty of people disagreein the short run. Eventually, however the stock IS the company and I just don’t see MSFT as compelling. They have no new revenue drivers and Windows 7 will have to be a hit just for them to maintain. Meanwhile others are chipping away at the base cashflow generators bit by bit. Pardon the pun. The Apple commercials really say it all. Why waste time on this stock when there are so many better choices? IBM, Google, Apple all come to mind.
annieandjack is right! I’ve been a customer of msft for well, ever since atari’s computer system went belly up (remember TOS operating system?). Anyway, I’ve lived through 3.1 and above. Customer service stinks (try getting an “English speaking” person on the other end that is understandable and who actually gives a crap).
Vista was and is a dud for many reasons, mainly demonstrated by an “I don’t care” attitude by msft. My poor 78 year-old mother-in-law’s nightmare with vista and the way they condescended to her was rude, not to mention, “we’ll fix it for you for $200+”.
Enter, Apple! Totally different atmosphere and customer service attitude! I haven’t bought an Apple yet, but my next purchase will be! Windows 7? no way on my $?
I expect msft will do well, short term, with “7”. Perhaps the stock will do well too. Long term, they need to rethink customer service strategy is they want to retain customers. From what I’ve learned so far, Apple doesn’t have that problem.
I’ve been a loyal MSFT user since my first DOS pc, but have been as frustrated as anyone with most of the Windows releases with the exception of XP which is fine except a bit of a clunker to load. I retired earlier this year and switched to a Mac; awesome! While I see no reason to switch back, I agree with Jim’s perspective on MSFT for a 12 to 18 month investment. OS X is a great operating system, but I do not see it replacing Windows in the business environment because the majority of companies use WIN compatible legacy systems that are not going away. No doubt Vista was a huge waste of time and money, but Win 7 is going to make MSFT a lot of money if it’s as reliable as XP and from what I’ve read it is both reliable and less bulky. My wife plans to upgrade because she hates Vista and I don’t think she will be alone. Wait for a pull back!
After switching to a Mac I started going to Apple’s one to one sessions. It was then that I realized how brilliant Apple’s marketing strategies are how wonderful it is not to have to wait on the phone for the bored technical assistant to hurry you through the solution to your problem and how I, for one, would never go back to windows and McAfee popping up every two seconds to remind me to pay them more money.
MSFT also faces the most real compitetion it has faced in decades. Linux is catching up. By Ballmer’s own data, linux is now 5% of the global marketplace, up from a non-measurable figure 3 yrs ago. The same data puts Mac at 2% of global marketplace.
Competition also exists in Office space, with OpenOffice that does what most need and for free.
I am not rosey on msft’s future. No company that treats its customers as an annoyance can not do well indefinately.
I think MSFT will do pretty well into next year by looking at its lineup. Windows 7, Office 2010, Visual Studio 2010 and .Net 4.0, Windows Mobile 7 (its not android or iphone, but it should do better than winmo6.5), Windows Azure, on top of a growing Xbox/Zune division. I think MSFT’s product lineup has not been this strong in a handful of years.
DeficitHawk
Jim’s buys for his “standard” portfolio are usually for a time period of 12 – 18 months, is this what you mean by short term?
His current standing on MSFT since his buy on 7/24/2009 is:
Microsoft MSFT 07/24/2009 $23.50 $28.05 $1.46 19.36%
I too have been “burned” by MSFT, and wish that my emotional preferences hadn’t prevented me from picking this up when Jim did, but once again, I was proved wrong on this one. And I think that, now, after the fact, it will continue to move up in the “short term”.
The actions you describe are not the actions of a healthy company, especially a healthy tech company, where employee satisfaction is extremely important.
Seems like you’re purchasing for a short term trade, which is awesome, because I’m not smart enough to be able to pull that kind of stuff off. The market and next quarter’s earnings are usually two different things, and both are hard to guess.
But that’s just my perspective. I wish you luck – and you may be right, I’ve just been burned on msft too many times. It’s a company in decline.