Thursday, July 21, 2005

Microsoft Financials: "And then?"

Another financial announcement. Once again, I imagine the financial analysts on the other side of the speakerphone channeling a scene from Dude, Where's My Car? and saying:

And then?

Liddell: "No and then!" No real break-out product announcements on the horizon, other than the ever-so-cool immediate money losing XBox 360. And just how many times can you talk about releasing Yukon and Whidbey? Maybe FY07 we'll have a new vista to stand from and show how the next Windows and next Office will save our stock. Or not.

Some interesting tidbits are in Joe Wilcox' rummaging through the data:

  • Information Worker: "While Microsoft attributes some of the income decline to spending on marketing and new hires, I remain concerned about the division."
  • Microsoft Business Solutions: "I see no signs this division will achieve profitability in the near future."
  • MSN: "whopping"

Another view over at CNN / Money regarding the stock price and investor's reaction:

As such, some analysts say investors probably shouldn't expect the stock, which has been mired in the mid-to-high $20 range for more than three years, to move significantly higher.

"The stock has probably bottomed out," said Alan Davis, an analyst with McAdams Wright Ragen. "But with no dramatic increases in earnings any time soon, the stock will probably increase in line with earnings growth."

As for MBS and it making a profit: "We expect double digit revenues growth … including double digit, 10 to 11 percent, growth for MBS for the [FY2006] year," Liddell said. "We want to see improved profitability [in MBS] but we're not likely to see that in the coming year." This is where I whack the MBS-Dead-Horse again and simply ask: come forth with a date for any segment to be profitable. Commit to it. Be accountable if you miss that date and either decide it's time to reorganize or shut-down that segment. Same for Mobile. Same for Home & Entertainment.

So in general, the reaction is "eh." No expectation for stock growth anytime soon. There's curiosity over why increased PC sales didn't result in higher client revenue. Lots of praise for "Halo 2" coming to save HED.

What do shareholders think? Are they just biting their tongue, waiting for the new Windows to be released?

And yes, Google announced today and is going down in after-hours trade. But before you get too cocky and talk about an over-valued over-inflated whacked out Google stock, do take a moment to consider the past year's stock performance:

Dude!

 

(Sorry for the update spasm - my bad for trying to get fancy and include an image)

30 comments:

Anonymous said...

MBS. Hmm. Thinking about taking a job there. They seem to have an entrepeneurial, risk-taking culture there, committed to taking down giants in well-established vertical markets. Just like Office did with WordPerfect and Lotus 1-2-3 all those years ago. Or am I just a misty-eyed naif?

Anonymous said...

MBS. Hmm. Thinking about taking a job there. They seem to have an entrepeneurial, risk-taking culture there, committed to taking down giants in well-established vertical markets. Just like Office did with WordPerfect and Lotus 1-2-3 all those years ago. Or am I just a misty-eyed naif?

Anonymous said...

MBS. Hmm. Thinking about taking a job there. They seem to have an entrepeneurial, risk-taking culture there, committed to taking down giants in well-established vertical markets. Just like Office did with WordPerfect and Lotus 1-2-3 all those years ago. Or am I just a misty-eyed naif?

Anonymous said...

Hey there, triple-posting anonymous dude! I think Mini's point is that there are greener pastures elsewhere. Try GOOG, misty-eyed naif.

Adam V. said...

"Maybe FY07 we'll have a new vista to stand from..."

Not channeling this rumor, are you? ;)

Anonymous said...

I apologize for the triple posting. Must have been the triple margarita I was drinking at the time. :)

Anonymous said...

I think the performance of IW, Bus Sol and MSN were all unacceptable. Obviously, given its size, IW hurts the most with reported growth being minimal and even then only reflective of currency gains. Bottom line, IW has failed to provide a product that captures users imagination and/or tell that story compellingly. It's not about "tough comps" when the vast majority of the IB has yet to upgrade. Clearly, Raikes should be fired but of course that won't happen. Bus Sol is just a complete fuckup hiding behind the [lower] broad market growth rate to hide its chronic underperformance in the [much higher growth rate] small and medium sector. For example, what was saleforce.com's growth rate on the Q? Ans: several orders of magnitude better than 10%. Shit, even SAP grew license sales faster. Bottom line, ORCL's acq of PSFT was smarter and paid off sooner. Burgum should be fired - not rewarded with hundreds of millions of $ in options for a division who's performance is abysmal. And then we have MSN, the perenial laggard. What's it been now - a decade and still this division is an also ran? But hey, it was profitable this time so we should be impressed? I'd fire the division head but in fairness, I'm not sure Balmer has let MSN do everything it wants to do and in particular has let legacy product groups overrule MSN's plans. Then we that piracy explanation for the continuing trend of MSFT growth being much less than PC growth. Does mgt really believe investors are too stupid to realize this is really the increasingly adoption of Linux? And you know things are really bad when they have to highlight Xbox360 and then acknowledge that its expected 50% growth in 06 is going to seriously impact earnings on the negative side. So, to net it out, we have a stuck in neutral IW division, a barely growing Windows division that can't ship its core product, a Server division that continues to save our ass and then a menagerie of also ran emerging businesses that collectively are a sink hole for money. Go figure why this stock has grossly underperformed the market delivering just 2-3% growth in the past 3 years. And with this kind of news/guidance, we'll look back on that as "the good old days". IMO, MSFT took itself out of the growth stock category once and for all with this earnings report and there will be major repurcussions...

Anonymous said...

I think the most telling comment is that the NAS is barely down on the news. Translation: folks increasingly realize that MSFT's misfortunes have little to do with the IT market generally and everything to do with MSFT's lack of execution specifically. For added evidence, look at MSFT's below-average multiple. Translation: the market has more confidence in the average S&P mgt team than they do in the MSFT one. It's not every mgt team that can take one of the most profitable and widely installed franchises in the world and generate those kind of sub-standard results. Even fewer who can get paid a shitload of money to do so and still remain employed. Be proud guys - or maybe just do the right thing and step down.

Anonymous said...

MSFT? Oh right...weren't they a dominant IT player back in the 90's? Can you say Burroughs? Univac? NCR? DEC? Help me, I've fallen but I can't get up. MSFT is a great play for investors - as long as you're shorting it.

Anonymous said...

"This is where I whack the MBS-Dead-Horse again and simply ask: come forth with a date for any segment to be profitable. Commit to it. Be accountable if you miss that date and either decide it's time to reorganize or shut-down that segment. Same for Mobile. Same for Home & Entertainment."

What are you - a hard ass? :-) Absolutely agree. Where's the "accountability" that Ballmer is so fond of? Speaking of which, given the pathetic multi-year performance of the stock and these various groups, why does he still have a job?

Anonymous said...

Can someone please explain to me what is wrong with the MBS strategy? Why shouldn't Microsoft be investing in new businesses? The Windows and Office franchises have saturated the market. MBS builds apps (maybe not killer ones) that run on those platforms. For years, we've given away revenue to partners by letting them develop solutions. Why shouldn't we have a piece of that action? Are the objections to the strategy, or to the implementation?

Anonymous said...

"Why shouldn't Microsoft be investing in new businesses?"

MSFT should - and can't afford not to. But the current mgt team shouldn't because they clearly suck at it.

"The Windows and Office franchises have saturated the market."

So in other words, because it's no longer easy, slow/no growth should simply be accepted? Can you say better understand customer needs and innovate?

"Are the objections to the strategy, or to the implementation?"

Both. The strategy because it's really not about becoming a leader in bus apps (which would be smart) but about trying to leverage office. And clearly the implementation which has been an unqualified disaster.

"For years, we've given away revenue to partners by letting them develop solutions. Why shouldn't we have a piece of that action?"

Um...because the partner channel has historically been MSFT's main differentiator? Because having them allows MSFT to keep field resources way below others? Because in many cases, MSFT knows nothing about the market niche in question and it isn't big enough to warrant investing in that knowledge? Because if MSFT succeeds in getting a "piece of that action" those partners may just decide to throw in their lot with Open Source?

Anonymous said...

Client: piracy argument is probably bunk, but not sure Linux is to blame. There was the "mix shift" from 9x to Pro helping rev's for a while, and some of that Upgrade Advantage pullthrough as companies upgraded-in-place from 9x/2000 to SA...that carried through as unearned for a few years.

Anyway, that stuff's all gone now, so Client growth will trail PC runrate growth for a little bit, just as it was ahead for a little bit. By end FY06, they'll be back in lockstep.

Which is MS's strength and weakness: $100 (or so) for every PC sold! (Monopoly!) But...can do very little to influence how may PCs are sold.

I Worker. Time for somebody to speak truth to power and say the truth: Office 2003 sucks. Fucking sucks rocks. Horrible program. Apart from Outlook, there's nothing in Office 2003 worth upgrading for, and several things have broken. My IT folks forced me to upgrade from Office 2000 about six months ago and I have not become even slightly more productive.

Hey, though, did anybody see the jump in unearned rev here? That means that somebody got suckered into putting Office 12 on their EAs, so the suckiness of the last two releases hasn't quite damned this unit to hell yet. (But wait until OpenOffice gets halfway decent...buh-bye.)

S&T: I'm glad somebody at Microsoft knows how to ship products. Somebody give Muglia a promotion.

MBS: Doug Burgum's laughing like Steve Case did when he "bought" Time Warner.

MSN: See how they run after Google without questioning "is Google worth catching?" Once ad revenue tops out, the GOOG ride is over. Overall, this business division is a snore.

H&E: Here's a great Oracle business strategy: buy every Xbox (and Xbox 360) made, then don't buy any software for them.

Mobile: Call me when this division takes in above 1% of MSFT total revenue.

So yeah, not much going on. One solid monopoly, one weakening one, one area of reasonable new business, and a bunch of pet projects. Fortunately, the monopolies are a cash-generating machine.

But where's that cash going? Note that they spent almost all of it on stock buybacks. Why? To pay for new options--oh, wait, there aren't any new options.

Looks like contraction to me. Steadfast, Mini, you might yet get your way.

Anonymous said...

Throw Apple (AAPL)'s progress over the last year on that chart... chart looks about the same.

Anonymous said...

I worked for several years in large teams at Microsoft, but I now work on CRM (part of MBS). I strongly believe that there are huge opportunities for this product to become a cash cow. And yes, CRM does have an entrepreneurial feel and is definitely more "agile" than other big groups. So why don't you install the latest beta to take a look - you might be surprised at what it can do.

Anonymous said...

"I worked for several years in large teams at Microsoft, but I now work on CRM (part of MBS). I strongly believe that there are huge opportunities for this product to become a cash cow."

You "strongly believe"? Well gee, I guess I'll take that to the bank. Of course, any other businessman/investor/banker might want to know just a little bit more like how is a division that's growing slower than the most mature vendor in the entire space (SAP) going to suddenly generate the growth required against much faster growing mid-market players to take major share and become a significant business? See, you have to be a "star" first before you can dream of being a "cash cow". Then of course, you'd have to be hugely profitable versus at this point not being profitable at all and not expected to be until 07 at the earliest. And of course, profitability isn't sufficient you'd first have to pay back the investment to date which includes $B's to buy these entities, the opportunity cost of those $B's (including but not limited to interest foregone), $B's more invested in upgrading the technology and fielding the sales force, and ongoing losses racked up between now and then.

Don't want to single you out but this is an example of the simplistic thinking/justification that seemingly underscores virtually every MSFT "emerging" business. No regard for standard 3-5 yr paybacks. No regard for the grow and profitability rates required for the math to work - INCLUDING PAYING BACK THE INITIAL INVESTMENT AND ALL LOSSES RACKED UP IN THE INTERIM. No regard for the opportunity cost of the mgt time, company resources, cash and impact on earnings and therefore the stock and therefore shareholders. In other words, no regard for basic business common sense. MSFT is apparently so desperate to show any top line growth, that they continue promoting these emerging businesses despite massive losses and ever-lengthening windows to profitability in the vain hope that investors will be stupid enough not to drill down. Well guess what, we're not and hence the stock's continuing underperformance.

Anonymous said...

I think the post is most short-sighted and unrealistic. If MSFT were to not invest in groups like MBS, MSN and Home etc it will have the same story as some of those grand companies that you named like DEC etc.
Do you try to give constructive feedback and try to make things better. Or do you want to claim that senior management does not listen to visionaries like you.
Yeah, GOOG is very hot now, just wait to see how fast they come falling down or get stagnated. MSFT already has a legacy and made tremendous contributions to the whole world, not just IT dude. It has "really" changed the life of so many people around the world. Maybe you should pick up your ass and visit some places to see the software revolution jump started by MSFT has changed the life of so many people.

Anonymous said...

It has "really" changed the life of so many people around the world. Maybe you should pick up your ass and visit some places to see the software revolution jump started by MSFT has changed the life of so many people.

Dude, pass me some of that pipe!

What kind of candy-ass charity are we running here? Are we a utility or a public company responsible and accountable to our shareholders to ship great products that make great profits?

How hard is it for each group to target how much profit it's going to bring it by a certain date? And be accountable?

It boggles my mind that the shareholders aren't speaking up to demand we start acting like a 21st century company and cut prospects that are not panning out and fire unproductive groups. Does a group really have great potential that we just seem to be unable to realize? Expedia-them and spin them off. Disconnect them from the teet and let them stand on their own.

Anonymous said...

"I think the post is most short-sighted and unrealistic. If MSFT were to not invest in groups like MBS, MSN and Home etc it will have the same story as some of those grand companies that you named like DEC etc."

Sorry, how does sinking tens of billions into a group of businesses that collectively are unprofitable and growing at some 10% despite years of gestation while simulataneously screwing up your timelines on virtually all your main profitable products help you avoid being DEC? I'm not saying MSFT shouldn't invest in or otherwise acquire new businesses - they should. I'm saying THIS management team has shown themselves to be completely incapable of doing this EFFECTIVELY. In part, that's because these businesses are often throttled in order to maintain/avoid threatening some legacy product line or given ridiculous leeway to lose money year after year. A refusal to change with the times, an unwillingness to be the first to obsolete your own winning legacy products, and poor investments with even poorer accountability were EXACTLY what led to DEC's downfall.

"Do you try to give constructive feedback and try to make things better. Or do you want to claim that senior management does not listen to visionaries like you."

Are you KIDDING me? MSFT management doesn't listen to anyone except themselves - not customers, not partners and especially not shareholders. Do you think that an executive team that listened would blindly keep going down a path after THREE years of abysmal stock performance with the equity just off its all-time lows, a lower P/E than even the S&P average and a P/E 50% below its software peers? WTF do you think the market has been telling them loud and clear for all that time? Do they seem concerned to you?

"Yeah, GOOG is very hot now, just wait to see how fast they come falling down or get stagnated."

Wouldn't hold your breath. At 60X forward earnings they're a whole lot cheaper than MSFT relative to their growth rate and they've got the macro wind at their back - internet advertising is in its infancy. More importantly, who gives a shit except you and Ballmer/Gates who seemingly can't stop taking public swipes at them because they're a) jealous and b) juvenile. This is about MSFT and its current problems - not GOOG and its potential future ones.

"It has "really" changed the life of so many people around the world. Maybe you should pick up your ass and visit some places to see the software revolution jump started by MSFT has changed the life of so many people."

Ah, I new it couldn't be far off - every defense of MSFT lately eventually comes down to either how bright the future is or how great the past was. Increasingly, it's the latter. Well guess what? The market doesn't care about the past and its focus on the future extends to maybe 18 mths max - not the seeming decade-plus horizons that Ballmer is apparently focused on. Perhaps they should have just been candid with the market and said that they planned on taking a half-decade break from shipping core software and a decade-long holiday from growing the stock? Then we could all have met back up in 2010 with the stock at $5 but the future so bright, you gotta wear shades...

Anonymous said...

Ah, I new it couldn't be far off - every defense of MSFT lately eventually comes down to either how bright the future is or how great the past was.

J. Allard is thinking the former for his pet XBox. He'll kick the bucket before MS recoups it's investments and starts making a profit on XBox.

Anonymous said...

That's nothing. Extend the chart out to three years and add:

ORCL
IBM
SAP
INTC
CSCO
HPQ
YHOO
AAPL
ADBE

and pretty much everyone else you can think off including the indexes themselves and the software holders ETF. Result? They all beat MSFT. This has been and continues to be the worst performing large-cap tech stock period. And with announcements like this last one, it's clear that there's no chance of a turnaround anytime soon. Dead money.

Anonymous said...

Use your voting rights as a shareholder and don't reelect Ballmer and Gates to the board. I do this every year. It's time for a change at the top, and we should start with these two.

Anonymous said...

"It's time for a change at the top, and we should start with these two."

No shit.

sdsef said...
This comment has been removed by a blog administrator.
sdsef said...

It's nice to say that shareholders should speak up (and institutional holders should), but I think the power at MSFT really sits with the employees. You all are shareholders too and carry a lot more weight. Regular shareholders just get BS lip service. Employee holders have a voice within the company if enough of you act together. Go Mini-Microsoft! Make it happen.

It's time for Ballmer and Gates to go. Even a lowly bagholder like me knows that.

Anonymous said...

You "internal" peeps are blinded by the smoke from all of those pipes. However, it is very clear from the outside. There is more inbreeding at MS between the monopoly businesses and these new "break through" businesses than what has been admitted here. Can't sell your product or make it profitable? Hell, bundle it - make it free - show that GREAT innovation... or something like that...

Poopy technology that can't stand on its own gets rolled into one of the monopoly products and 'leveraged' as part of the greater franchise.

Or, build a bridge from one fairly successful monopoly to another and hope people get sucked into that too (think Office OEM preinstalls, Exchange Activesync sucking customers into mobilitys offerings, CRM on top of office offering minimal value but not as much as a partner-driven vertical solution, etc)...

In the end, an also ran, has been tech company clinging desperately (and successfully for now) to its past successes and continuing to ride that grey area between business ethics and business law. OSS, the legal system, and the industry at large will change that though.

The only exciting thing I see on the MS roadmap is the courtroom/news drama from future DOJ/EU/class action litigation and seeing the tipping point with your company's security problems as customers find future alternatives - THAT will be fun to watch.

Microsoft? Relevant? YAWN....

Anonymous said...

"http://msftbagholder.blogspot.com/

Their time has passed"

Nicely done bagholder. I think you captured the salient points exactly and make the case for change eloquently.

Anonymous said...

Mr. Bagholder,

Great blog. Help the cause and turn your comments on!

Anonymous said...

"This is where I whack the MBS-Dead-Horse again and simply ask: come forth with a date for any segment to be profitable. Commit to it. Be accountable if you miss that date and either decide it's time to reorganize or shut-down that segment. Same for Mobile. Same for Home & Entertainment."

HED beat both its revenue and profit targets for the past fiscal year. I guess Larry Ellison isn't reading the comments on this blog to learn about buying up all the xBoxes...

On the other hand, I'd love to see the legacy, monster revenue generating divisions actually come close to intended ship dates and feature sets...

Anonymous said...

HED beat both its revenue and profit targets for the past fiscal year.

So, when exactly will we have made back the roughly $5 billion we spent on Xbox 1? Single quarter targets are all nice and dandy, but HED is already in a mighty big hole. Slam the legacy divisions all you like, they certainly have their issues. But remember, they have generated a nice profit over their *entire* lifetime and keep the loss-leaders like HED, Mobile, MBS, and the rest alive.