Microsoft earnings by D Klein 07/25/09

MSFT missed earnings by two cents per share, in part due to deferring 276 million in revenue for Windows 7 or two cents per share, and one time charges resulting in another two cents per share.  Actual results were $0.34 vs estimates of $0.36.  Accounting for the charges and deferrals earnings would have been $0.38.  What spooked the market was not earnings but the revenue miss IMO.  Given last quarter results, the state of the economy, Microsoft missteps (think Vista), and the fact that Microsoft is between product cycles, one has to wonder why analysts thought revenue would grow about six percent on a sequential basis quarter to quarter (Q to Q).  Even Microsoft is not immune to the events of the last year.

Client revenues were down sequentially from 3.3B to 3.1B (see table below).  Hard to see this growing much while Windows 7 revenue is being deferred to future quarters.   If revenue was not deferred revenue would have been slightly up.  In the first quarter of FY09, between $1.1 billion and $1.3 billion will be deferred from the Windows 7 tech guarantee program and presales, the majority of which will be recognized in the second quarter of the fiscal year, or the December quarter.  Companies have pulled back on their IT spending,  computer sales are weak and Intel noted back in April it was the worst they’ve seen in six years but think it has bottomed.  Bottom line, don’t expect signs of a rebound until Q2 at a minimum.

Server and Tools, and online services business were slightly up Q to Q.  It’s yet to be seen if the launch of Bing can make some inroads but reviews and initial data look promising.  Should know by Q4 if this launch has some legs, although any deal with Yahoo could change things, IF it happens.

Microsoft business division was slightly up Q to Q.  They are also between product cycles so any upward trend at this point is positive.  Why rush to upgrade office when office 2010 in the works. 

Entertainment and devices division looks like it ran off a cliff dropping 400 million or 24%.  I would not expect much out of this division in the near term and would not count on this division to drive the stock anytime in the near future.  If anything, short term, it’s a drag on the stock IMO.

Overall year over year revenue dropped about 5%, mostly due to the recession.  If the economy has bottomed I doubt we will see a sharp rebound in corporate and consumer spending so I’d expect Septembers quarter not to be much better than this one.  I would not expect the effects from the new product cycle to start kicking in until the December quarter.  A silver lining could be MSFT is focusing more attention on cost control in this environment, something that may pay off when a recovery starts.

I said the following in my last MSFT blog:

I’m going to guess that MSFT will do fine with the next product cycle and once a recovery starts but things could get uglier until the global economic recovery becomes obvious.”  and “could report numbers for June that may bring down the TTM numbers and probably will IMO”

Well no shock, things did get uglier,  June did bring down the TTM numbers,  and next quarter may not be much better but this could present a buying opportunity IMO before the next product cycle is in full swing or any possible search deals or acquisitions are inked.  It’s beyond me why analysts saw the quarter as if the economy or product cycle was not a problem.  Decembers results will be key and how it relates to any economic recovery.  Then again I could be wrong so if you have an opinion lets hear it.


SEGMENT/Period Ending 03/09 06/09
Client 3,273 3,108
Server and Tools 3,469 3,510
Online Services Business 721 731
Microsoft Business Division 4,507 4,564
Entertainment and Devices Division 1,567 1,189
Unallocated and other 111 (3)
Consolidated 13,648 13,099



Trailing 12 month revenue                  
SEGMENT/Period Ending 06/07 09/07 12/07 03/08 06/08 09/08 12/08 03/09 06/09
Client 14,965 15,695 17,264 15,909 16,566 16,569 16,181 15,530 14,279
Server and Tools 11,175 11,581 12,018 12,523 13,167 13,670 14,134 14,343 14,132
Online Services Business 2,472 2,607 2,845 3,066 3,214 3,313 3,316 3,194 3,088
Microsoft Business Division 16,380 17,065 18,367 18,281 18,935 19,774 19,841 19,601 18,899
Entertainment and Devices Division 6,089 7,007 7,099 7,728 8,154 8,040 8,163 8,154 7,753
Unallocated and other 41 118 305 447 384 353 346 353 286
Consolidated 51,122 54,073 57,898 57,954 60,420 61,719 61,981 61,175 58,437




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