July 13, 2001
Heard on the Street
On Wall Street, Microsoft
Gets Some Friendly Calls
By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
When it comes to Microsoft, Wall Street analysts want to have their digital cake and eat it, too.
Many analysts covering the company historically have given Microsoft lots of credit for the gains it realized on a vast pool of high-technology investments, treating them not as occasional gifts to the bottom line but a lucrative, continuing part of the company's business. Microsoft has encouraged the practice: The company's official line is that such investments are "strategic" and should be considered a core part of earnings.
Yet, even after the company's disclosure Wednesday of a whopping $3.9 billion write-down to cover drops in the value of some stock investments, it looks as though Microsoft shares won't be penalized for the bad turn of events in its investment portfolio.
Indeed, Credit Suisse First Boston analyst Wendell Laidley upgraded Microsoft shares to a "strong buy" from a "buy" after the company's warning, citing the company's additional disclosure of slightly better-than-expected revenue growth for its fourth quarter ended June 30.
Meanwhile, Thomas Weisel Partners' David Readerman reiterated his "strong-buy" rating on the Redmond, Wash., company. John McPeake, who covers Microsoft for Prudential Financial, also focused on the upbeat revenue news and played down the investment loss. He wrote in a research note that "because this write-down is one-time in nature ... we think investors will brush [it] to the side."
Apparently they have. Microsoft shares were up $5.10, or 7.7%, to $71.60 at 4 p.m. in Nasdaq Stock Market trading Thursday.
So what gives?
Microsoft says it isn't trying to brush anything under the rug. To the company's credit, it fully included the effect of the write-down in a new earnings prediction issued this week. In a short statement Wednesday, the company said it expects to report a net investment loss of $2.6 billion for the quarter, primarily due to the what the company called a $3.9 billion pretax noncash charge. Microsoft said the item would slash diluted earnings per share to just a penny, instead of the healthy 42 cents a share that analysts had been predicting. Most of the damage came from poorly performing investments in cable and telecommunications stocks, Microsoft said.
"Microsoft hasn't changed [its] tune in acknowledging that these are strategically important to the company," a spokeswoman said. Company officials, she added, see the investments "as core to their business, and have said in the past that any gains or losses related to them should be considered part of the company's core operating results."
But apparently Wall Street doesn't see it that way. "The analysts will ignore this," predicts Chuck Hill, the director of research for Thomson Financial/First Call, one of the major sources of earnings-per-share projections for investors. He expects that the earnings estimates submitted to First Call by analysts probably will continue to be about 42 cents, meaning they will exclude the effects of the investment losses.
It is a situation he finds somewhat hypocritical. "It does kind of raise questions about the analysts including the gains from these investments earlier," he says. "I think these companies are getting away with a lot here with what they're either including or excluding."
Many tech companies have benefited from investment gains, and Mr. Hill thinks more write-downs are on the way. "I think we'll see it from a number of other tech companies," he says.
Clearly, when times were good -- before the Nasdaq Composite Index crumbled from its March 2000 high above 5000 to below 2000, in what seemed like Internet time -- including those investment gains helped boost Microsoft's bottom line.
Sometimes those gains helped the company beat Wall Street's official projections, sending Microsoft shares higher. According to Drew Brosseau, who covers Microsoft for SG Cowen in Boston, gains on investments contributed about 15 cents of Microsoft's $1.70 in profit for its last reported fiscal year ended in June 2000.
The gains peaked in the last quarter of that fiscal year, Thomas Weisel's Mr. Readerman says. By his count, eight cents of Microsoft's 44 cents in profit for the period came from gains in the company's investment portfolio; an additional six cents sprang from nonrecurring interest income. That meant the company's earnings from its core operations -- designing and selling computer software -- were only 30 cents.
Mr. Readerman pointed this out publicly at the time. Now, he says he remains bullish on Microsoft shares, despite the reversal in the investment portfolio, because growth in the company's core businesses has picked up. "I'm looking forward, not backward," he says.
In its Wednesday statement, Microsoft said it expects revenue for the fiscal fourth quarter in the range of $6.5 billion to $6.6 billion, instead of the $6.3 billion to $6.5 billion it previously predicted.
Still, Mr. Readerman says Microsoft's huge write-down does raise a broader question of why companies aren't punished for losing money on investments, but are often lauded for profiting from them. "It's hard to explain," he says. "I don't have an answer for that."
Part of it may stem from analysts' desire these days to accentuate the positive about technology companies, particularly Microsoft, whose shares were beaten down last year during its antitrust troubles. With much of the technology sector in a revenue funk due to slowing demand for personal computers and other, high-powered technology systems, some analysts seem eager to find a silver lining in any news.
Indeed, Microsoft's new revenue projections aren't all that significant, according to SG Cowen's Mr. Brosseau. He already had been expecting Microsoft to report revenue of $6.5 billion, which lies at the low end of the company's updated revenue range. "The reality is that the numbers [reported Wednesday] weren't materially different than what was out there" already, he says.
Still, Microsoft's shares zoomed up about $4, or 6%, in after-hours trading on Wednesday, before gaining their additional ground Thursday.
Microsoft's stock also might have gotten a boost from its announcement this week that, in response to a court's ruling in its antitrust case, it would give computer makers new flexibility to configure programs and third-party software on their screens. The move was a concession for Microsoft, which had resisted such moves before, and might indicate a willingness to settle the case. Microsoft said the moves were separate from any settlement talks, although the company announced Thursday that it had settled antitrust claims with the attorney general of New Mexico, one of the states involved in the lawsuit.
As for the $3.9 billion write-down, SG Cowen's Mr. Brosseau says: "It's not quite fair to just be able to write this off."
Write to Rebecca Buckman at rebecca.buckman@wsj.com1
--------------------------------------------------------------------------------
URL for this Article:
interactive.wsj.com |
