G-S Research on MSFT this morning:
We reduced est for MSFT (and 20 other software companies) on Monday, Sept 17th, recognizing that the tragedy of Sept 11th would have negative consequences for the economy, for software sales, and PC demand. We may need to cut further, but for now we await results for the Sept quarter to better calibrate how business is tracking and just how aggressive cost cutting efforts are at MSFT, that might mitigate further EPS exposure. Our estimate reduction for fiscal (June) 2002 to $1.86 from $1.92 does not include potential exposure to the $0.10 per share gain expected on the sale of Expedia to USA Networks in the December quarter,which will likely be reduced given the share price declines (see below).
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=================== NOTE 6:03 AM September 28, 2001
Stk Latest 52 Week Mkt Cap YTD Pr Cur
Rtg Close Range (mm) Change Yield
--- ------ ------- ------- ------ -----
RL 49.96 74-41 263938. 15% 0.0%
--------------Earnings Per Share---------------
Sep Dec Mar Jun FY CY
2003 FY
2002 FY 0.38 0.55 0.46 0.47 1.86 1.98
2001 FY(A) 0.46 0.47 0.44 0.43 1.80 1.80
-Abs P/E on- -Rel P/E on-- EV/NxtFY LT EPS
Cur Nxt Cur Nxt EBITDA Growth
----- ----- ----- ----- -------- ------
FY 26.9X NMX 1.2X NMX NA 16%
CY 25.2 1.2
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We have received a lot of questions about whether we will be cutting estimates on MSFT following the recent estimate revisions from our PC and semiconductor analysts, all addressing slower PC demand and whether the Sept 11 tragedy will cause consumer PC demand to be slower in the December quarter and beyond, resulting in a more sluggish uptake for the upcoming new Windows XP launch. Our recent estimate reductions did not get much attention given all the news that the market had to absorb that day, but these cuts have already reflected our best first guess as to the magnitude of the impact on the software sector. For MSFT, we reduced
our first (Sept) fiscal quarter revenues by $250 million from $6.125 billion to $5.875 (down 4%) and our EPS estimate from $0.40 to $0.38. MSFT's business is not as back-end loaded as most of the software sector, so the impact should be less for them in the September quarter. The bigger question is how much impact will we see on PC demand for the December quarter and through the first half of calendar 2002.
We cut $150 million from December, thinking that the launch of Windows XP could be a benefit, but we believe this number may need to come down further. It is not clear what the EPS impact would be if we had to cut further given that some industry sources tell us that the company is being extra aggressive now in cutting costs, but this is not clear and we cannot calibrate this until we see results for the Sept quarter. For the full year (fiscal June 2002) we cut EPS from $1.92 to $1.86, up from $1.80 reported in the June 2001 year. Directionally, we know PC demand has been coming in pretty weak and the tragedy of Sept 11th will be an incremental negative for demand, but trying to be precise on the extent of the reductions is what we struggle with.
Separately, the tragedy has been particularly hard on the travel industry and the share price of Expedia has come down sharply from about $45 to about $22. Street estimates for Microsoft have baked in a $0.10 per share gain from the expected sale of Expedia to USA Networks in the December quarter. This would imply the gain to MSFT from the sale of their shares in Expedia will be less, probably by a few cents per share (the computation is complex and there are undisclosed and uncertain factors). We presume this deal is being renegotiated now that the share price is outside the collar range, and the gain will likely be less. If there is any renegotiation, it would likely push the closing date out to the March quarter. This all assumes a successful completion of the merger, in the absence of any information to the contrary.
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The Street does not yet appear to have focused on the exposure Microsoft has to the $0.10 per share gain in the December quarter. This is a non-operating item, which we would normally exclude from earnings, but investors have included it given that last year included a similar gain and
there is a desire to be consistent.
Our December quarter revenue estimate is $7.25 billion, up 23% sequentially. This includes an estimated $300 million from the launch of Xbox, the sequential increase is 18% without this, which compares with 14% last year. If the Windows XP launch were not as successful in adding revenues sequentially and PC demand is simply worse than expected, an assumption of a similar 14% sequential increase as we experienced last year would imply about $250 million of revenue exposure in the December quarter. This is about $0.03 per share before cost reductions. We could see similar adjustments in the following quarters, perhaps offset by cost reductions. Our earlier estimate reduction was directional in nature and we will need to get a better view of the September quarter and expense levels before addressing estimates further, but the likelihood is high that we are not done cutting estimates. |
