Wednesday, April 29, 2009

MSFT's Earnings Call: No Ballmer and No Strategy

Microsoft (MSFT) held its Q309 earnings call last night. The market liked that they met the consensus of $0.39 EPS (if you back out severance costs). They liked that the company announced an additional reduction of OpEx by $1B and CapEx by $200MM from the January call. Shares ended the after-hours session up 3%.

But, the real reason for the rally was that MSFT didn't fall off a cliff.

Some observations about the call:

Where was Steve? Steve Ballmer pulled a Vikram and didn't make himself available for the call. That shocked me, given the short interest and bearish sentiment on the stock over the last year. The message Ballmer -- and any CEO who does this -- sends to shareholders (including MSFT employees) is: "you're not important enough for me to spend my time with you." Evidently he was doing "real" operational work -- perhaps thinking of how to get the Online Services Business (OSB) segment to start making money.

A Dour View. Chris Liddell, the CFO, handled the call and provided three quarters of an hour of pure bleakness. There were no upbeat earnings to discuss like at AAPL or AMZN. You get the sense from Liddell that everyone at MSFT is in the bunker waiting for the all-clear. The leaders' best guess of when that will happen seems to be FY11 or FY12. Not very motivating for employees -- or investors. Fortunately for me a holder of the stock, the market seems to discount Liddell's apocalyptic views.

"Hurry Along. Nothing to See Here." MSFT's new GM of IR at MSFT, Bill Koefoed, who handled the earnings call, had the most militaristic approach I've ever heard to analysts on an earnings call. The analysts were warned they would get 1 question. It had to be short -- no embedding multi-part, multi-threaded question, and certainly no follow-ups. You had the impression these analysts were being hustled in the room to ask their question and hustled right back out. Koefoed also had an uncanny ability to not allow half a second to pass between Liddell's last word and urging to moderator to get on to the next analyst. The call ended 49 minutes after it began -- a record for any earnings call I've been on (unless you count some of the sub-$200MM market cap companies I've listened to who only have 2 analysts on the call). I love efficient people -- especially engineers and CPAs -- but the whole point of these calls is to let shareholders and analysts ask questions, not shut people up as quickly as possible, which is how it came across.

Analysts Posed No Questions About OSB's Performance The analysts' quesitons were largely forgettable. There were more to help them tinker with their Excel models than address some of the real challenges facing MSFT. For example, I would have liked to hear Liddell expound on where things stand with the OSB segment. Revenues for the segment dropped and losses doubled. None of the rumored partnership deals with Yahoo (YHOO) will really change that.

What is the Growth Strategy for this Company? Stepping back, it would have been nice if one of the analysts asked: "where is this company going?" The costs savings this quarter are great (and there are -- in my view -- many other areas where they could further reduce costs). But how exactly is this management team going to use its considerable assets to grow the business segments again? How are they going to get MSFT's forward multiple up from 8x (ex-cash) to above the S&P average of 15x?

Cash is Still King. Despite these issues, the company continues to be "Fortress Redmond." Its cash increased to $25B in the quarter. They are clearly conserving their horde, by slowing down stock buybacks and showing no interest in acquistions. Liddell indicated that this attitude would continue indefinitely -- or when the economic nuclear winter ends, whichever comes first.

Well done: Server & Tools. This segment -- the smallest of the biggest 3 segments -- actually grew revenues and EBITDA in the quarter (7% and 32% respectively).

Position: Long MSFT.

Originally published in on 4/24/2009 7:00 AM EDT

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