1Qfiscal17 earnings for Microsoft(MSFT)

MSFT reported a strong 1Q17 after the close last night.

Revenue was up +3% (non-GAAP) year on year.  Operating income was flat, on the same basis, and net up +6%.  EPS was up by +9%, at $.76, exceeding the high end of the expectations of the thirty-odd professional sell side analysts who follow the company.

Growth businesses, like the cloud or the Surface line of laptop/tablet hybrids, were up strongly.  Legacy businesses held their own.  Guidance is for a flattish 2Q17.

 

In many ways, the MSFT report is similar to the Intel (INTC) results from the night before.  Guidance for both companies appeared roughly the same, as well–more or less flat quarter on quarter performance, during a period that’s typically seasonally strong.

The reaction in the press and in the stock price for MSFT, however, was strongly positive.  The stock was up by 4%+ when the results were made public   …and by more than that after the conference call.  As I’m writing this on Friday afternoon, MSFT is holding onto almost all of its after-hours gain during a down day on Wall Street.

INTC, in contrast, fell at all three waypoints–announcement, conference call, next-day trading.

 

Part of the contrast in stock performance has to do with the differing nature of the two companies’ businesses, hardware vs. software.  Part is a function of the greater speed at which MSFT has been able to demonstrate that it is turning itself around.

 

On the other hand, I find it noteworthy that there should be a 10% relative performance difference in two days between the two behemoths who were once the constituents of the former Wintel alliance–and on bottom lines that, if we removed the company names, don’t look all that different.

The rest, of course, must represent two different sets of expectations.  I hold both stocks, which I’ve been studying for over a quarter century (and which I find a little scary).  My expectations aren’t that different.

I’m not simply grousing about being wrong aobut INTC.  I think of investing in the stock market as somewhat like playing a game whose rules each player has to figure out as play progresses.  I’ve often likened the difference between investing in, say, the UK or Japan vs. the US as like that between playing checkers or Sorry and playing chess.

I have a hunch that in reports like these we’re seeing evidence of a change in how the stock market game will be played in the US in the future.  If so, it will be important to catch on to the new state of things as soon as possible.

 

Microsoft (MSFT) and LinkedIn (LNKD)

Before the open in New York yesterday, MSFT and LNKD announced that the latter has agreed to be acquired by the former in a friendly all-cash deal for $26.2 billion, or $196 per LNKD share.  Satya Nadella, the MSFT chairman, describes the merger as the coming together of the professional cloud with professional networking.  The acquisition price, a 50% premium to where LNKD was trading beofe the announcement, represents a bit less than 7% of MSFT’s market capitalization.

The most interesting aspect of the deal is that MSFT shares only fell by 2.6% in trading yesterday, in a market that declined by 0.8%.  To me this is indicative of the tremendous positive mindset change that has happened by investors about MSFT since the end of the disastrous Steve Ballmer era.

 

 

March quarter earnings (3Q16) for Microsoft(MSFT)

MSFT reported earnings for its fiscal third (=March) quarter after the close yesterday.

My takeaways:

–the company had a good quarter for its future-oriented cloud and mobility businesses during a period where the legacy PC business was unusually weak.  In the latter arena, MSFT did substantially better than the market.

–the strength of the dollar continues to be a drag

–income tax.  Geographically, the US has been stronger than expected, emerging markets weaker.  One result of this development is that MSFT has adjusted its estimate for the corporate tax rate for the full year from 19% to 21%.  The full revision for the first nine months was made in the 3Q income statement, boosting the March quarter tax rate to 24% (this is normal accounting procedure).  That clipped $.04 from what eps would otherwise have been.

–company guidance for upcoming quarters is being revised down somewhat, in a justifiably cautious way.  The dollar is one issue.  But the bigger headache seems to me to be weakness in Latin America, the Middle East and Africa, where lots of transactional (as opposed to long-term contract) business takes place and where tax rates are lower.

–today’s selloff appears overdone to me.  That’s partly the way markets move nowadays, reacting violently to headline news.  It’s also partly because MSFT had been up by 35% over the past year in a market that has been basically flat over the same time span.

–I’m not tempted to transact.  I see no reason to sell the shares I own.  If anything, I’d be a buyer below $50.  But I see no reason to rush.

 

three weird things that happened this week

1.  Greece  After months of vitriolic negotiations and after calling a referendum in which it successfully campaigned to have Greece vote against accepting a financial bailout from the EU/IMF, the Greek government appears today to have accepted that bailout.

2.  Chinese stocks  After plunging for a month, Chinese stocks have risen by 10% over the past two trading days.  The world is breathing a sigh of relief.  I’m not sure what’s weirder–that this happened or that foreigners believed for a short while that in a country where doing anti-social stuff can get you either a long prison term or beheading, rather than the cover of Forbes, China would be unable to achieve this outcome.  Actually, the foreign belief is way weirder.

3.  Microsoft/Nokia  Less than fifteen months after acquiring the cellphones business of Nokia, MSFT has discovered that what it bought for over $7 billion (led by mastermind Steve Ballmer) is essentially worthless and is writing off virtually the entire purchase price.  The stock went up on the news.

Which is weirder:  that the MSFT board that rubber-stamped this disaster is still intact?  …or that people are still buying Clippers season tickets?   I suppose you could argue that Nokia was the price for getting rid of Ballmer, which would imply that the behavior of Clippers fans is weirder.

December 2014 earnings for Microsoft (MSFT)

the report

Last night MSFT announced earnings for the December 2014 quarter, which is the second fiscal quarter of 2015 (ends in June).  At eps of $.71 a share, results were in line with analysts’ expectations, even though income was dinged by $.02  by restructuring charges and $.04 from an IRS audit adjustment.

Overall, the report was a mixed bag.

On the one hand, the restoration of MSFT to relevance under new CEO Satya Nadella continues apace.  On the other, the renewed vigor that the traditional MSFT business has been exhibiting recently appears to be coming to an end.  In particular,

–In the earnings release on the MSFT website (data are humorously difficult to download if you don’t own Office) the company made it clear that the period of extra oomph to sales of Windows caused by the termination of XP support has come to an end.  Sales had been boosted both by some former XP users upgrading to new machines and by others simply buying a newer OS.

–It’s also clear that we’re entering a period where currency effects–the decline of the euro and the yen vs. the dollar–are going to have a significant negative impact on earnings.  I think this means a drop of somewhere between 5% and 10% vs. where profits would be without currency movements.  This loss takes two forms:  a decline in the value of foreign currency-denominated assets, which is recognized immediately (in 2Q15 the figure was ($390 million); and the lower dollar value of foreign currency-denominated sales.  Part of the latter is recognized in income immediately but most sits on the balance sheet as deferred revenue before reaching the income statement (this is a long-winded way of saying that some currency losses won’t be booked for a while).  And, of course, the euro is about 8% lower today than it was on December 31st.  MSFT estimates the 3Q15 loss at 4% of revenue.

The net result of these two negatives will likely be that eps for MSFT will be flattish over the coming twelve months, rather than the +10% that most analysts appear to have been forecasting.  (How they justified these numbers in the face of the strong dollar is another issue.)

the stock

As I’m writing this, MSFT shares are down by 10%, in a market that is off by a bit less than 2%.

It’s also a day on which I’m sure lots of people didn’t make into work (and those who did are in a bad mood), as well as one where a raft of negative-surprise earnings releases have been issued.  So it’s not a good day to announce bad news.

Still, I’m personally a bit surprised by the extent of the negative reaction.  I’m not sure quite qhat to make of it, other than it’s very negative.

I have no desire to sell the MSFT I own.  On the other hand, I have no burning desire to buy more.

If I thought 2015 would be a sharply up year for stocks, I’d probably be thinking of selling to buy something with more upside potential.  But I expect the market to basically move sideways this year.  So I’ve got to be more concerned that this decline is just the first stop on a down elevator.  Right now, I don’t think that’s right, either.  But that’s where analysis has to be focused.

My biggest reaction is that I’ve got to look even more carefully through the stocks I own to uncover exposure to weak foreign currencies.  Ultimately, I guess, I believe this is the cause of the sharp MSFT price drop.

The main thing the MSFT report tells me is that Wall Street is much less far along than I would have imagined in discounting currency losses to US-based multinationals from a declining euro.  A second observation is that the European stock markets have probably been as poor at factoring in earnings gains that euro-based firms are achieving from their dollar exposure.

 

 

 

 

earnings calls: Apple (AAPL) vs. Microsoft (MSFT)

Last night after the market close, AAPL reported earnings per share that beat the consensus of Wall Street analysts–and the stock went down in the after-market.  MSFT, in contrast, reported results that fell short of analysts’ estimates–and the stock went up!

What’s going on?

AAPL gave next-quarter guidance that fell below Wall Street’s projection–but it always does this, so that’s not the reason.  MSFT’s income statement looks better after factoring out the large operating loss generated by Nokia, but I don’t think that’s the reason for the market’s positive response, either.  After all, if you wanted to (I didn’t), you could have gotten a reasonable guess at how much Nokia would subtract from the MSFT total from Nokia’s recent results as a stand-alone company.

I think the market’s response is much more a a conceptual response.

Tim Cook has made it clear that AAPL is a manufacturer of high-end mobile consumer technology.  There’s no “next big thing” on the horizon, however, with only a periodic refresh of the company’s smartphone line due any time soon.  If reports from suppliers are accurate, new offerings will include a phone with a large, Samsung Galaxy-matching screen size, and a(n even larger) tablet/phone.  For Jobs-ites, this departure from Steve’s view that phones should be small enough to operate with one hand may be earth-shaking.  But for the rest of the world, this is only catching up to what Samsung already has on the market.  So a ho-hum Wall Street response is appropriate.

For MSFT, on the other hand, the news is relatively better.  The company seems to have a focus for the first time in a long while.  The fact that Nokia is putting up operating losses at a near-$3 billion annual rate seems to me to justify the downsizing MSFT has recently announced.  The only surprise is that this wasn’t started sooner.

Leaving the X-Box content creation business is probably more symbolic than anything else, but it removes a potential distraction–especially given the continual mess the company has typically made of its game software development efforts.

One, admittedly small, figure what caught my eye was that MSFT has added another 1,000,000 individual/small business users to its Office 365 rolls during the June quarter.  I think this just shows the power of the cloud–easier administration, much lower cost-of-goods expense, and hugely better protection against counterfeiting.

For MSFT, then, the earnings were nice, but the fact that the company’s board is allowing significant changes is nicer.  True, the message may turn out only to be that the company will try harder not to shoot itself in the foot again, but even that’s an uptick.  Hence the positive market response.  Absence of missteps won’t be good enough for long, but it’s ok for now.

buying Microsoft (MSFT) !?!

Yes, that’s what I’m beginning to do.  I’ve bought a small amount and intend to add to it on weakness.

For me, this is an unusual step, since MSFT isn’t exactly what you’d call a growth stock.  Quite the opposite.  It’s a value idea.  I’ve been building to it for some time, though.  I few months ago I wrote that in a year like 2014, where I imagined (and still do) that a stock that’s up by 10% will be an outperformer, the bar is set pretty low.  And after thirteen years of decline vs. stocks in general, the news that the company had dysfunctional management and had gone ex growth had been pretty thoroughly worked into the stock price.  My son-in-law told me it’s the nicest thing he’s ever heard me say about MSFT.  (It was a big part of my portfolios all through the 1990s, however.)

I also privately scoffed at prominent value managers who loaded up on MSFT several years ago purely on the notion that the stock was cheap, ignoring the issue that change of control was well-nigh impossible.

What’s changed?   …or, better, what’s changed my mind?

As I mentioned above, the market situation is one thing.

The stock’s metrics haven’t moved much:  steady cash flow of $3+ a share, earnings of $2.75, a dividend yield of just under 3%.

There’s a chance earnings may improve over the next few years:

–the board of directors has put new top management in place.  A cadre of looks-good-in-a-suit-but-doesn’t-do-much lieutenants are disappearing, as well.  There’s no guarantee that the new guys are any better than the old.  On the other hand, it’s hard to imagine they’ll be worse.

–Apple’s failure to produce an adequate alternative to the Office suite has limited the inroads it can make into MSFT’s corporate market.

–Windows 8 (I just got a new touch-screen laptop) is pretty good–very iPad-ish.

–a new generation of Intel chips + the emergence of Samsung, Asus (my brand), Acer and Lenovo making high-quality products may well reenergize the US consumer market.  Much lighter weight, high-resolution screens, instant-on and touchscreens may counter some tablet momentum.

–with its consumer/small business products, MSFT has had a continuing (large) piracy problem.  The shift to the cloud will help police that.

–new management may do good things.  Even if not, the idea that the company is turning a new page will likely support the stock until we can make a better judgment.