Microsoft (MSFT) reported fiscal second quarter earnings on January 28.
The really good news for investors was what wasn’t in the blowout numbers. And what’s happened to the company’s business since then.
The second quarter results were good enough on their own. (Microsoft’s fiscal year ends in June.)
The company reported earnings of 60 cents a share. Once you added back in $1.7 billion in deferred revenue and about 14 cents a share in earnings from sales of Windows 7 that Microsoft decided it would recognize in future quarters the earnings picture looked even better at 74 cents a share. Wall Street analysts had included that deferred revenue in their estimates of 59 cents a share for the quarter. That made this is a 15 cents a share earnings surprise.
The company attributed the surprise to better than expected sales of its new Windows 7 and Windows Server 2008 R2 software launched in October. Through the second quarter Microsoft had sold 60 million Windows 7 licenses, making it the fastest selling operating system in history, according to the company.
But what’s really interesting for investors who want to know not what Microsoft did in the quarter but what the stock might do going forward is that the company reported it still hadn’t seen a significant contribution to sales from corporate—known as enterprise—purchases of Windows 7.
 Pretty much all the strength through the end of 2009 had come from consumer purchases. In fact booked sales in the key enterprise business of servers and tools were flat and business division sales actually declined 5%.
When will those enterprise sales kick in? It looks like this is a story that will begin in the second half of calendar year 2010 and then really build up speed early in calendar year 2011.
By early March Wall Street analysts were reporting that their checks of sales channels showed significantly more companies signing up to beta test Windows 7. (No company in its right mind buys a new operating system until it has a chance to see how it runs with existing applications software.)
The stock actually sold off big on the day after the earnings announcement and then continued down until it hit a bottom, along with the rest of the market, on February 8.
I suspect the rebound since then is one part general market recovery, one part buying by value investors who like the long-term story (if 2011 is considered long-term) and one part Google/China hype. Wall Street has been abuzz with speculation that Google’s (GOOG) potential departure from China will be a boon to Microsoft, which has struggled to gain traction in China’s huge Internet search market. The buzz got louder with the news that Microsoft has, according to the Wall Street Journal, hired three people from Google’s China unit.
Interesting to speculate about but I’d rather put my money on an increase in sales to corporate customers. As of March 18, I’m raising my target price to $36 a share by October from the prior $33 by June.
Full disclosure: I own shares of Microsoft in my personal portfolio.
After Ballmer finally leaves MSFT, a new type of leadership will take over, which I see as good. The story of established tech giants like MSFT has to include a consideration of growth through massive capital investment vs. innovative startups funded by venture capital. Established tech giants helped to create venture capital funding by paying fat premiums for hot startups. If tech giants turn to hiring talent from start-ups or home grown “copy-cat” innovation, venture capital funding for startups will dry up and tech giants are left owning the gateway to innovation.
…won’t all the money jump onto safety and profit and away from growth and risk?
Hey Jim, I’m a bit confused about something. You keep mentioning that the second half of 2010 could spell trouble in the market, yet you increase price targets like here for MSFT and extend them out into the middle of this troubled second half. If the market does pull back or stall in Q3 and Q4, won’t the receding tide sink all ships?
When I think MSFT, I think a SW company which targets the Enterprise & the Consumer having desktop & internet properties. Now lets see if they are best of breed (BOB) in anything (stealing this from Cramers oft repeated phrases):
As I look across the landscape, I dont see them being BOB in anything sans perhaps DT software where they have the lions share and its a cash cow. But they are not playing a significant role in any of the emerging areas, many companies come to mind which seem better investment for my $, such as CRM, GOOG, AAPL. So if you want to inest in a cash rich, cash generating machine with lower growth, go for it. Else pare your expectaitons down – they need needle moving biz and they havent found one yet. An acquisition (assuming they dont break it and integrate it well) could be the answer.
Working in a part of IT in a Fortune 500 company I know we are building and testing corporate images with Windows 7 and plan to retire XP this year. I bought in at $20 a few months before this became a pick. Everyone I have talked to at work is really impressed with 7 and we are in this market cycle where enterprise spending is going to occur. Whatever they did software and project management-wise differently from Vista I hope they keep it up.
microsoft’s windows phone 7 operating system set to go against android and iphone has recieved overwhelmingly positive press coverage.
As someone who works for a very large company (many thousands) we are still using Windows XP. I’m guessing Windows 7 will still be at least a year away. We have only started upgrading systems to Office 2007.
Obviously, as most know, Vista was a complete failure.
I have a hard time getting excited about MSFT. Every time I see a picture of Steve Ballmer he looks befuddled as to why consumers just don’t understand how good MSFT’s clunky new products are. Why oh why do they prefer Apple? Windows 7 mobile…will not run any old windows mobile apps…need I say more?
From what I have seen in a big company say about 5000 employees, is once they decide a new OS like Windows 7 is OK for them they don’t go out and buy it for everyone or switch over all existing products. Instead they put in on any new computers bought, and evaluate its use for each new product (the company I’m thinking of makes expensive testers, which of course have an OS on them). And maybe for the next release of existing products.
They don’t replace a working OS like XP just to have the latest and greatest. I guess other companies could have different policies, and XP is certainly getting long it the tooth. What really puts fire under a company though is if Microsoft says it is no longer going to support the old OS.
Of course going from basically 0% upgrades to any % should drive quite a bit of supply.
That is the part of being an investor is the hard part for me. Figuring out if this or that is really something that will cause demand or not. For instance Cisco can crow all it wants about how fast its new product is, but I think for an investor it is much more important if the market place is creating new demand.
Holding MSFT for over a decade has been water torture while watching AAPL and its growth from the sidelines. Still holding. Hated Vista. Love Windows 7. Bing is odd. As a small business with 20 computers running XP, I would love to upgrade to Windows 7 but thats the cheap part with $500 computers. Its the training and upgrading or buying all new software (I know about and have tried XP mode) that is the expensive part. 64 bit programs will make this a compelling upgrade, but until then I think a lot of us are greasing the squeaky wheels of our business and trying to figure out how we are going to pay for the inevitable health care tax and increased taxes.
Can anyone answer the (your opinion) question; who is the next Steve Jobs, Bill Gates, Buffett, Jubak? Any up and coming CEO’s, developers, investors? Just looking for one of these stand out names that may be recongized in this group within the next ten years.