The earnings news out of Microsoft (MSFT) yesterday, April 22, after the stock market close in New York, was good but good isn’t getting investors very excited these days. Unless a company delivers great earnings and ups guidance as well, shares have been selling off on just good news this quarter.
That’s the way this market is expressing its nervousness about the Greek debt crisis, monetary tightening in China, and the uncertainties of Wall Street reform during this earnings season.
And so Microsoft shares dipped on its earnings report in the market’s after-hours session and were up just a nickel on the open in New York even though the company is growing just the way that investors in the stock, a Jubak’s Pick in July 2009, had hoped.
Revenue for the company’s third quarter of fiscal 2010 (Microsoft’s fiscal year begins on July 1) grew to $19 billon as sales of Windows 7, Microsoft’s new operating system, produced a 29% increase in revenue for the Windows business unit. Most of that growth came from consumers with unit sales of Windows to corporate customers flat from the year-earlier quarter. That wasn’t unexpected. Microsoft has repeatedly said that it doesn’t expect corporate sales to kick in until the second half of 2010 and early 2011. So that piece of the Windows 7 good news story is still in the pipeline.
The company’s other units posted just so-so results. Revenues in the Server unit grew by just 2%. In the Business software unit revenue actually fell by 3% as corporate customers put off some purchases of Microsoft’s Office software ahead of the release of Office 2010.
At the bottom line, where revenue turns into earnings, the story was about lower operating expenses. Nothing captures Microsoft’s transition from a growth rabbit to a growth tortoise—slow and steady, remember, wins the race—better than investors’ newly discovered concern with expenses at Microsoft. So while earnings of 45 cents a share, which exceeded Wall Street estimates by 3 cents a share, still count, many analysts led their reaction to the company’s quarter by noting that Microsoft had said that operating expenses for the company’s full fiscal year would come in $100 million to $200 million lower than previously projected by the company. That should help keep gross margins near the 81% announced for the third quarter. (Wall Street had estimated gross margins of 78.9%.)
All in all, I think the Microsoft story remains on track—no surprises in this quarter to either the upside or downside. I’m going to tweak my target price just a little to reflect the company’s higher margins but that’s it. As of April 23, I’m raising my target price to $37 a share by October from the previous $36.
Full disclosure: I own shares of Microsoft in my personal portfolio.