To all: Interesting street.com Adam Lashinsky article re MSFT.
--QS
Microsoft Notebook: Some Straight Talk By Adam Lashinsky Silicon Valley Columnist 7/28/00 7:20 AM ET
REDMOND, Wash. -- Steve Ballmer spooked me Thursday.
He said he's never been more excited -- or more nervous -- about the road ahead for Microsoft (MSFT:Nasdaq - news - boards), referring to its massive Microsoft.Net Internet software project. He said he refused to sing his annual gloom-and-doom song. He said he isn't at all sure when or even whether Microsoft's bets on emerging technologies like Internet software platforms or wireless-data markets will pay off.
In short, he neither tap-danced his usual woe-is-Microsoft routine, nor did he convincingly suggest all would be fine in Redmond anytime soon. Instead, he sounded just a wee bit defensive about his beloved company's prospects.
If there is one take away (that's MBA-talk for what schoolchildren refer to as "What I learned at school today") from Microsoft's yearly meeting with Wall Street analysts and investors, it is that no matter how exciting the future may be for Mr. Softee, the near-term outlook gets bleaker and bleaker.
Consider:
- The growth rate for Microsoft's main business, desktop software, has slowed to a relative trickle. This is a $17 billion business growing at 12% per year. CEO Ballmer repeatedly refused to predict growth rates for the business, but acknowledged it will never again be a 25% to 30% growth business. Microsoft's overall revenue in the year ended June 30, 2000 was about $23 billion. Earnings were $9.4 billion, or $1.70 per diluted share.
- The world's leading software company is investing heavily in new businesses, but says R&D spending will increase only 16% to $4.4 billion in its fiscal year ending June 30, 2001, compared with a 27% increase in the fiscal year just ended. This is a huge investment, of course, but the decreased growth rate is a reminder that Microsoft is a quarter-century old and showing its age in more ways than one.
- Because of investments in growing businesses such as video games and small-business initiatives, the amount Microsoft will spend to generate revenue will rise this fiscal year after falling for three consecutive years. The company's cost of goods sold as a percentage of overall revenue has fallen from 18.2% in fiscal 1997 to 13.1% in fiscal 2000. In other words, three consecutive years of improving gross margins will come to an end. "You will not see a chart like this again," said John Connors, Microsoft's chief financial officer, predicting an uptick in 2001.
- Microsoft's fastest-growing business is its billion-dollar consumer business, which includes its MSN Internet business. Its revenue grew at a 70% rate last year, and Microsoft is counting on this business -- headed by former Hewlett Packard (HWP:NYSE - news - boards) and Silicon Graphics (SGI:NYSE - news - boards) executive Rick Belluzzo -- to be one of its best contributors to growth. And yet it is undeniably where Microsoft faces its most intense competition. New services and products like Microsoft's enhanced television/Internet software platform and video games will go head on against established competitors at the top of their games, such as America Online (AOL:NYSE - news - boards) and Sony (SON:NYSE ADR - news - boards). Microsoft fought tooth and nail in its early days to establish itself as a leader, but it never launched new products into clearly defined markets that were dominated by existing leaders.
- Without giving analysts any reason to raise their near-term revenue and earnings forecasts, the company did make Wall Street aware of a series of large hits to the current fiscal year's bottom line. For example, its consulting joint venture with Andersen Consulting, Avenade, is a money-losing operation and will contribute losses to Microsoft's income statement in fiscal 2001. Microsoft will spend an astonishing $500 million over 18 months to promote the launch of its video-game-console business and another $150 million on its small-business programs.
In all, despite several reasons for long-term optimism for a powerful, profitable company with a top-notch management team, it was not a joyous day for Microsoft fans.
"The numbers don't go up coming out of here," said David Readerman, an analyst with Thomas Weisel Partners in San Francisco who's been bearish on Microsoft's shares over the last half-year. "They're still not addressing why Windows 2000 is not being accepted. It used to be that software pulled through hardware, but that's not the case today. Why not?"
Said Mary Meeker, the famed analyst for Morgan Stanley Dean Witter whose first big career triumph in the 1980s was recognizing Microsoft's potential: "The question is, What does it mean for the stock? They're facing tough compares for two quarters" -- meaning that year-earlier performances make comparisons less impressive -- "and they're not helping" by giving little specific guidance on the near-term outlook.
Still, Meeker said she exited the day actually feeling better about Microsoft than she did before. She said she's impressed by the apparent results of Bill Gates' focus on strategy and software development, as well as by Belluzzo's accomplishment in building the Internet business into a contender. More, Meeker suggested the Microsoft.NET strategy answers the Internet's crying need for a unifying software platform. "They do that better than anyone else," she said. In short, she thinks investors should be heartened that the long term is being addressed, even as the short term is in doubt.
Ballmer made perhaps the strongest and most convincing argument that near-term revenue growth is not what's important. "Investing in the company is," he said. He even presented the cup-half-full perspective on the company's higher employee attrition rate of 9.6% last year compared with 7.4% the year before, calling the departures a "cathartic cleansing" of employees who'd been sticking around for their stock options to vest.
Ballmer concluded his formal remarks Thursday with an extraordinarily humble statement. "I love our company," he said. "I think we have an incredible future. I think we're investing in all the right things." And then he expressed confidence that the company can take its game to the next level, a level that neither Microsoft nor anyone else has ever seen.
As ever, it seems foolish to count it out. Ballmer noted that lately he's been studying General Electric (GE:NYSE - news - boards) out of admiration for a company of its size that still can grow revenue annually at 15%. But software markets are far more volatile than markets for light bulbs or household appliances, and Ballmer must know that one way Jack Welch ensured GE's future when its growth stalled was with extremely painful restructuring.
Microsoft may well regain its greatness, especially if some of its major investments pan out. But for the time being, it is a company growing earnings per share at 21% with a price-to-earnings ratio of about twice that. And it's defensive about its prospects. Oh, and it remains immersed in the biggest U.S. antitrust suit in a generation.
Investors might have liked to have heard some good ol' disingenuous gloom and doom instead. |
