Briefing.com on Mr. Softy...the analyst is usually quite sharp...
Microsoft's Bad Call
[BRIEFING.COM - Gregory A. Jones] Microsoft beats estimates by two cents. If you stop reading there, you will have a hard time understanding why Microsoft (MSFT) will be trading
down sharply come Monday. Though Microsoft beat published earnings estimates, it missed the whisper number, it missed revenue projections, and in the ensuing conference call, CFO
John Connors guided numbers lower for Q4 and all of FY01. This was not just a cautious call, it was a downbeat call, and the tech sector will feel aftershocks as a result.
To best get a sense of the Microsoft news, we offer some notes from the conference call. We'll skip all of the product news, which largely consisted of self-congratulatory comments
about Windows 2000 and Microsoft's Internet properties. When the call really began was with the outlook discussed by Connors.
The Outlook
Q3: The light revenue number was attributed to slow corporate PC demand. Though Microsoft officials were pleased with the successful launch of Windows 2000, the fact is that this is
an enterprise operating system, and not enough enterprises bought PCs in the quarter to produce the expected revenue results.
Q4: Analysts had been estimating $0.43 for the Apr-Jun quarter, but Connors said that a penny or two should be taken out of these estimates, and later said he was comfortable with
estimates of $0.41. He attributed this downward guidance to Q4 to three factors:
Weak corporate PC demand.
Tough comparisons with prior year due to Office 2000 launch last year.
Delays in purchases due to the launch later this year of Windows Millenium (Windows 98 successor) and SQL Server 2000.
FY01: Connors said that analysts should take a nickel out of FY01 estimates, though he later specifically mentioned a $1.88 figure, which is just four cents shy of the $1.92 consensus. He
also said that revenue growth should be in the mid teens area, well below analyst estimates of around 20%. He blamed slower corporate PC demand for the softer figure.
The Q&A
These preliminaries were bad enough -- caution is common at Microsoft, but downward earnings and revenue guidance are something altogether new. But to get the true feeling of the
call, you had to listen to the Q&A with analysts. Here are some of our notes:
SG Cowen analyst Drew Brosseau asks what Microsoft has seen countering the Windows 2000 launch that has prompted the more pessimistic revenue outlook for FY01:
Answer: weaker corporate PC demand. While we acknowledge that demand could pick up, we feel that a more cautious outlook is warranted.
Follow-up -- is something materially different, such as a maturation in the PC business:
Answer: Microsoft's numbers are so large now that achieving 20% revenue growth is simply not that easy to accomplish.
JP Morgan analyst Bill Epifanio asks what the best chance is for an upside surprise in FY01:
Answer: Key factors are 1) the overall growth rate in PC demand; 2) the percentage of those PCs that are business PCs; 3) the penetration of Windows 2000 in
the corporate market.
Goldman Sachs analyst Rick Sherlund says that like the prior two questioners, he is trying to understand what happened to change the revenue outlook so significantly -- if it's just a
post-Y2K business PC slowdown, then why do we need to reduce revenue forecasts for next year. Is this just a case of Microsoft being conservative:
Answer: Yes, we are being cautious, but that seems warranted given that we haven't seen business PC demand. Notes again that 20% growth is difficult to
achieve on such large revenue numbers.
Follow-up -- Sherlund says that he assumed an 18% revenue growth rate for FY01, did MSFT believe that the consensus was closer to 20%:
Answer: There were a number of forecasts that were higher than 18%.
Follow-up -- how bad were Jan/Feb for PC sales, and what was the March rebound like:
Answer: As Pentium III shortages were addressed, there was some pick-up in demand. Also notes that some corporate customers are waiting for the release of
Windows 2000 Service Pack 1 (ships in June) before committing to Windows 2000. OEMs were more optimistic in the last three weeks of March, and Intel's
results also suggest that sales may be better this quarter.
Morgan Stanley Dean Witter analyst Mary Meeker asks about FY02:
Answer: Not surprisingly, Connors refuses to discuss the outlook that far out; so much for that question.
Follow-up -- has PC growth slowed to a steady-state level:
Answer: No, we are more optimistic than that, but we also want to be cautious. It's more a matter of when, not if, PC growth will reaccelerate, and next quarter
will be critical in determining if it has.
Thomas Weisel analyst David Readerman asks if weak PC sales were primarily in the US, and how this weakness can be reconciled with Intel's positive view:
Answer: PCs were weak in the US and Europe, but a bit stronger in Asia. Intel is a leading indicator and as such, if Intel is improving, Microsoft should see that
down the road.
The Skinny
We skipped questions from a Warburg Dillon Read analyst and an AP reporter that were not as interesting, and note that this is not a transcript -- these are excerpts from our notes on
the call and are clearly subjective. But we feel that they capture the tone of the call, and it was not optimistic. The theme was one of confused analysts trying to get Microsoft officials to
explain why weak PC sales in January and February were being used as a reason to slash five percentage points off of next fiscal year's revenue growth. Given that the question was
posed repeatedly with different variations, these analysts were clearly not satisfied with the responses. The risk of some brokerage firm downgrades on Monday is very real as a result.
There will be those who argue that there was nothing new in the conference call; that Microsoft is always cautious about the future. But again, we would challenge those holding this view
to cite examples of past calls in which Microsoft specifically told analysts to reduce estimates for the coming five quarters.
If this were simply the result of Microsoft's legal woes or some other MSFT-specific problem, the tech sector might be able to escape this news unscathed. But that was not the case --
weak corporate PC sales have implications that extend far beyond Microsoft. You can believe that Microsoft is simply being overly cautious and that Intel's optimism combined with the
late March pick-up in PC sales are harbingers of a reversal of fortunes. Those are certainly possible outcomes, but for now the black cloud of a Microsoft warning will not be easily lifted.
It will take proof in Apr-Jun PC sales to lift this cloud, and until then, tech stocks generally and old tech computer hardware and software specifically will continue their recent anxious
trading trends.
Greg Jones - gjones@briefing.com |
