Thursday, January 26, 2006

Microsoft FY06Q2 Results

Collection of FY06Q2 results:

Go SQL server! I'm glad we finally got you out there.

Xbox? The main revelation was that we've sold 1.5 million Xbox 360s. We were asked what the specific problem was in production and whether the 3rd manufacturer is going to do any good if there's a systemic problem. Liddell was evasive. There was a component problem (supply? quality?). I think we should be 100% clear why we're struggling for because otherwise you're going to have conjecturing... like the only reason not to say the problem is because the first generations out there getting the heck played out of them all have the issue, like a ticking bomb.

As for Vista: yes, out by end of 2006. In time for the back-to-school computer purchase rush? Not saying yet. And que Mr. Wilcox:

I remain convinced that Microsoft will have missed a major hardware upgrade cycle when Windows Vista and Office 12 ship later next year. Every PC sold with Windows XP is potentially a lost or significantly delayed Windows Vista sale, starting later this year. Microsoft is betting on new licensing options available late next year will increase volume license uptake for Windows Vista.

Let's hope, as the analyst's question was quite leading in this regard, that we get Vista out in time to meet the 2006 back-to-school market.

And folks in MBS should go kiss their CRM colleagues... or at least give them a friendly pat. Location of their choosing.

28 comments:

Anonymous said...

Why does it matter if vista comes out or not for the kiddies? Don't they end up paying the windows tax anyway (either for XP or Vista)? Unless the Vista tax is higher than the XP tax?

Anonymous said...

The vista tax will inevitably be higher than the XP one, with all the different SKUs out there (home, pro, enterprise, ...). But also it is meant to be a platform for shiny new apps (inc office 12), and help fend off the threat of other platforms. Compared to the latest linux distros and OSX, winxp is starting to look old. There's no bluetooth, the thing is insecure out the box (we have a private subnet just to bring XPSP2 boxes up to a patch level where they are safe), all the "secure by design" features of vista are denied to developers; .NET still isnt built in and internationalized to all the countries XP Ships in, etc, etc.

The longer vista takes to ship, the more any developer that targeted the platform suffers, while those who didnt, dont. Mac laptops/desktops may actually gain some intel native apps and start to sell, etc, etc.

And, and this is important: all the companies who subscribed to windows with a promise of an OS and office upgrade during the time period get nothing. That has pissed off a lot of enterprises, who are going to think hard next time around. You can see that in the slides, EA renewal rate=66% to 75%, meaning 1/3 to 1/4 of the participating enterprises dont think it is an agreement worth repeating -despite all the penalties in the EA if you want to get out or back in after leaving. That's serious; it means that 25-33% of enterprises have decided to stick with the OS they get with the PC an upgrade it that way; with new hardware only.

XBox 360 sales are interesting; I'd like to see how badly sales of XBox classic consoles/games have died to see if game developers have been badly hurt by the fact that XBox is dead but the replacement not out there. Still, the team has a big lead over PS3.

Ezra said...

Hey Mini-Microsoft:

Great coverage of MSFT!

We wanted you to know that we posted a full transcript of yesterday's MSFT conference call at SeekingAlpha.com.

Enjoy!

Anonymous said...

The numbers reported are really quite disgusting. Liddell's email to employees highlighted specifically our $7.7billion share repurchase over the last quarter, saying that it was the biggest ever.

If that's true, why are there only 300,000 shares fewer on the open market? Those represent less than $9mm -- where's the rest of the money, Chris?

Oh, I forgot...we give huge stock grants to the select few at the top. The $7.7billion represents over $125k PER EMPLOYEE in the company -- but needless to say, I'm not looking for my $125k in my paycheck next week.

The sheer magnitude of the number is sickening. To wrap it up in the guise of "returning the money to shareholders" is even worse. I know it's not illegal, but it's not something that a listening tour with Lisa Brummel is going to solve.

Anonymous said...

"The vista tax will inevitably be higher than the XP one, with all the different SKUs out there (home, pro, enterprise, ...). But also it is meant to be a platform for shiny new apps (inc office 12..."

Maybe so, but this has nothing to do with back to school sales and missed opportunities - you think the kiddies will buy vista enterprise?

Anonymous said...

I hate to break it to you, but the difference isn't 300,000 -- it's 300 million. The figures listed in the Q2 report are all in millions.

There are over 10.56 billion shares outstanding, down from 10.87 billion shares. That's a 317 million reduction in total number of shares.

If you spent 7.7b on 317m shares of Microsoft stock, you spent $24.29/share. Not a bad deal if you ask me.

Urp said...

In order to hit back-to-school on new machines, you have to ship in March/April, maybe May at the very outside. For Christmas, you have to hit roughly June/July, and August at the very outside. It takes that long to get a new OS on systems, tested on the hardware, and then in the channel. It varies by OEM, though.

Chirs Jones has already committed in the press to no later than August 31st, 2006. Launch (i.e. retail box availability) would be 60-90 days past that date. However, retail upgrades aren't the key to volume. You need OEMs like Dell, HP, etc. Back-to-school, no way. Christmas, yes way.

Anonymous said...

It was one of the better Q's in a while even though the company missed its own downwardly-revised revenue guidance. I guess that says a lot about how poor previous ones have been, but at least this one wasn't one long excuse-fest and forward guidance actually got taken up for once. Agree that Liddell was totally evasive on the specific issue wrt to the Xbox 360. As I've pointed out before, why is candor always a last resort for MSFT mgt? It was a major miss (albeit that many expected it to be even worse) and imo, we should have heard specifics about why along with some personal accountability. Instead - and as always - that wasn't forthcoming. WRT MBS, unsure why you think that result deserves a kiss? To put it in perspective, MBS with 3% of the global ERP market and focused on the virtually wide-open S/M space (where folks like Salesforce/Rightnow are growing at 50-100%), only managed to grow licenses at the same rate as SAP - who should have their own problems with the "law of large numbers" that MSFT mgt like to hide behind. While that's better than not growing like some recent Q's, it's still a very unsatisfactory result imo and insufficient for this investment to payoff and MSFT to gain major share. And what was with MSN's profit drop off? Expected reduction in dial-up subscribers? Don't recall them setting expectations that MSN's profit would drop by 50M last Q? Also have to commment on MSN's ad business. Again some vague explanation was given that the YHOO transition negatively impacted results, but this sub 20% growth is just ridiculous in the context [again] of a market growing at 50-100%. Both groups need to turn things around asap and/or get new mgrs who can accomplish that. At this rate, Mobile is going to be more accretive soon than either.

Anonymous said...

"If you spent 7.7b on 317m shares of Microsoft stock, you spent $24.29/share."

Your sentence is inconsistent with the market. Microsoft share did not go as low as $24.29 during the last quarter. So Microsoft can't get this deal.

Anonymous said...

>Agree that Liddell was totally evasive on the specific issue wrt to the Xbox 360.

Chip manufacturing yield problems for the Xenon CPU perhaps?

I recall reading that Sony is telling developers that only 7 of the 8 SPEs should be considered usable on the PS3's Cell, in order to improve their chip yields.

Anonymous said...

"I hate to break it to you, but the difference isn't 300,000 -- it's 300 million. The figures listed in the Q2 report are all in millions.

There are over 10.56 billion shares outstanding, down from 10.87 billion shares. That's a 317 million reduction in total number of shares."

This is just plain wrong, and a bit of checking the SEC filings will show you that today we have 10.64 billion shares outstanding. As of Sept 9, we had 10.65 billion shares outstanding.

So the $7.7 BILLION did go directly into people's pockets. Certainly not mine.

Anonymous said...

"Chip manufacturing yield problems for the Xenon CPU perhaps?"

Possible. There was some vague reference on the cc to component shortages but when some uncommonly clued-in analyst asked "If that's the problem, how's adding a 3rd mfg going to help?", there was more shucking and jiving. Bottom line, there appears to have been component problems, mfg problems, etc. not to mention some pretty suspect business decisions (i.e. multi-country launch with limited qty, hopelessly over-aggressive forecast). But as usual, if you're looking for a straight answer from mgt or god forbid a mea culpa, you'll be waiting a long time. The philosophy of current MSFT mgt seems to be that shareholders/analysts (possibly customers/partners and general employees as well) are all mushrooms and therefore should generally be kept in the dark and feed a continuous stream of manure.

Anonymous said...

"not to mention some pretty suspect business decisions (i.e. multi-country launch with limited qty, hopelessly over-aggressive forecast)."

You do not even get the reasoning behind the multi-country launch and they imagined this. That's why you get only a good salary and they get multi million dollar pay package.

The idea behind the world wide launch is Xbox Live. This is a feature which could create a networking effect. And it is important that one could get a plenty of other players at all hours and from all culture and geographical areas. Japan turned out to be disappointing and so is manufacturing problems. But if Microsoft could create a critical mass of a Xbox Live worldwide subscribtion then Networking effect could start beating a possibly superior PS3.

Anonymous said...

"This is just plain wrong, and a bit of checking the SEC filings will show you that today we have 10.64 billion shares outstanding. As of Sept 9, we had 10.65 billion shares outstanding."

FWIW, according the 10Q (the best source for this info imo) share+equivalents outstanding is now 10,638B down from 10,856B in the previous period. There were $7.4B of share repurchases on the Q and $.466B of additional dilution (zero rtn being good enough for shareholders over multiple years, but not mgt who expect cash bonuses on the barrel head every Q regardless of performance). If you do the math, you'll still come up short. Unsure why but suspect it's because those diluted shares are given at a discount and therefore equate to more shares than the straight division by share price would suggest. There was also some vague reference on the CC to not all shares repurchases closing on the Q - so some may not be reflected until next Q. Of course, the real issue isn't this debate but rather why there's a debate at all. Why doesn't mgt just clearly list the number of shares retired (net) in the earnings report for all to see like CSCO and others do? After all, they supposedly believe in "transparency" right? Gee, could it be because since inception, the buyback hasn't managed a YOY reduction in shares+equivalents yet and even this mgt team knows that if shareholders saw that $40B+ of THEIR money had been hijacked to pay a chronically underperforming mgt team, the proverbial shit would hit the fan?

The Deepings said...

So the question is - is the xbox360 bigger than sony's playstation 3 is going to be?

Anonymous said...

"You do not even get the reasoning behind the multi-country launch and they imagined this. That's why you get only a good salary and they get multi million dollar pay package."

Would that be like the brilliant reasoning that forecast 3-3.5M units and only sold 1.5? I'm in sales and if my team and I missed our forecast that badly, we wouldn't even get that "good" salary. Life is good in Redmond if you're a VP - that's for sure.

"The idea behind the world wide launch is Xbox Live. This is a feature which could create a networking effect..."

So the reason for doing a WW launch despite ridiculously limited qtys and in Japan, no blockbuster local titles was to get a leg up on the one service for which MSFT is already far ahead of SONY? You my man have a bright future as Bach's apologist.

Anonymous said...

Are there really fixed buying cycles? I do not understand how the short past of operating system upgrades can be extrapolated to indicate that you are missing some kind of way point. A major operating system release like a new console release is an event, a mammoth engineering task and a lot less prone to small timing issues.

If anything you are likely to be a victim of your own success when it comes to operating systems. I am only likely to upgrade when I need to, rather than because I want to. I still haven't felt the need to upgrade my home o/s running 2k. I like XP but I still find 2k to be good enough.

Anonymous said...

"So the question is - is the xbox360 bigger than sony's playstation 3 is going to be?"

Is it? I thought the question was will this EVER be a profitable exercise for MSFT and therefore have made business sense? WRT PS3, given the installed base of Playstations, its launch will almost certainly do bigger numbers than 360 and particularly so in Japan. The good news, if there is any, is that it looks like their ship dates may slip as well...

fCh said...

Last December, $7.7Bn was spent on stock buybacks at a little over $27 apiece. In effect, about half of the buyback went to reduce the number of outstanding shares, whereas the rest must have been gone to cover for the funny compensation scheme - stock grants, etc.

fCh said...

So the question is - is the xbox360 bigger than sony's playstation 3 is going to be?

Define "big", please! As far as gaming experience and such, Sony's cell processor puts its console way ahead. But then there are applications, time to launch and such. Then we don't know how much Sony will subsidize out its console. On its side, MSFT has time and more time. If the guys in XBox can turn their lead to market into an advantage, (e.g. sort out through the supply issues and turn on more games while keeping an eye on the technology), it has a go.

fCh said...

Addendum to my Xbox posting:

Yesterday, ROBERT J. BACH, the Sr. VP in charge with Xbox among other things, sold 45,000 shares @ $28.26 apiece (cashing $1,271,502.00). Over the past 6 months, he has sold MSFT stock worth $8,021,000.

BTW, yesterday he exercised his option to buy 89,000 MSFT shares @ $6.22 apiece. So, you'd have to reduce the $ amount he took home yesterday by $553,820.31.

Anonymous said...

"Yesterday, ROBERT J. BACH, the Sr. VP in charge with Xbox among other things, sold 45,000 shares..."

fch, it is not a big deal for a Sr. VP of a hugely successfully company to have such number of stocks and options..

Anonymous said...

"Would that be like the brilliant reasoning that forecast 3-3.5M units and only sold 1.5? I'm in sales and if my team and I missed our forecast that badly, we wouldn't even get that "good" salary. Life is good in Redmond if you're a VP - that's for sure."

Where the heck are you getting your numbers from? The 90 day estimates were 2.75-3 million.

By december 31st, at the 45 day mark, 1.5 million had been sold. Doesn't sound too far off the mark to me ...

Anonymous said...


fch, it is not a big deal for a Sr. VP of a hugely successfully company to have such number of stocks and options..


I don't plan on speaking for fch, but are we not to understand that in Robbie's selling all these shares there would be an answer to the question of how well XBox is supposed to do? That's his vote of confidence in the business...

We, SUN, and Oracle are just few examples of companies where the founders have long outlived their usefulenss. What do they do other than unload stock... leading by example, anybody?

Anonymous said...

Do you guys really want Robbie Bach to go?It seems that Microsoft is a little weak on the executive bench.

Anonymous said...

"I don't plan on speaking for fch, but are we not to understand that in Robbie's selling all these shares there would be an answer to the question of how well XBox is supposed to do? That's his vote of confidence in the business... "

This is crazy implication. You take any of your favority company in which you believe VPs level employees would have high coinfidence in their company prospect, you will see VPs would be selling stocks of these orders. There is a personal need to use the earning to make dreams come true. Or sometimes it is just for diversification. If you want to get any signal from stock activities of VPs then you should try to find out how much they have kept. What they do with the money they got from selling shares. Are they buying Sony's stock o even Nintendo's stock.

Anonymous said...

This is crazy implication. You take any of your favority company in which you believe VPs level employees would have high coinfidence in their company prospect, you will see VPs would be selling stocks of these orders. There is a personal need to use the earning to make dreams come true. Or sometimes it is just for diversification. If you want to get any signal from stock activities of VPs then you should try to find out how much they have kept. What they do with the money they got from selling shares. Are they buying Sony's stock o even Nintendo's stock.

When Robbie unloads stock worth $8 million over six momentous months for his business, I think it's more than the simple need for diversification or dream realization. Not to mention his most recent sale that came in the year everything is supposed to turn around.

I think it's sign that all company related wisdom percolating here is not confined to this blog, it transcends well into some corner offices around our campus. Consider our investors indiference and there you have another layer to the story.

Do you guys really want Robbie Bach to go?

No, it's not Robbie I meant to point out. On the contrary, he's the good guy whose hands are tied by the two at the top.

fCh said...

I see that one of my postings here generated some activity--not bad considering that dialogue fuels insight.

My point regarding Mr. Bach's transactions was that, in the last 1/2 year, he's come across as rather bearish on MSFT. But then again, he might have needed the money to upgrade his house or fund some college-education scheme.

The larger issue is with how tech companies decided to account for the stocks and options portions of their compensation arrangements. Here, Barron's puts it so well:


For companies with rich stocks, the inclusion of option expense makes high price-earnings ratios even higher. Ebay's 2006 P/E rises to almost 50 from 39, while Yahoo!'s (YHOO) goes to 60 from 45. Yahoo!'s effective P/E is lower than 60 because it owns a valuable stake in Yahoo! Japan.

Microsoft (MSFT) and Amazon.com (AMZN) have shifted to restricted stock, rather than options. Such shares are issued to employees and, like options, vest over several years. Their value is based on the stock price when the grant is made. Accounting rules have long mandated that companies treat restricted stock as an expense because there's a clear value associated with it. Since Microsoft switched to restricted stock in 2003, it has emphasized actual profits, although some analysts still like to focus on the company's pro-forma figure.

Some tech companies say they report two sets of earnings figures to provide "comparability" with last year's results, when option expensing wasn't required. One investor theorizes that tech firms are hoping for a "one-year free pass," but he believes that, ultimately, they will have to focus on profits with option expense, probably starting in 2007.

The Bottom Line
Investors must be careful in comparing the earnings of companies such as Cisco and Microsoft, since the former issues two sets of numbers and the latter only one.


For the entire article, check at barrons'com for "Losing the Anchor"
by ANDREW BARY