On July 23, Microsoft (MSFT) announced results for their 4th fiscal quarter of ’09, which Wall Street found disappointing. Although they met the analyst consensus EPS of $0.34, what garnered more attention this earnings season was the top-line. Unfortunately for shareholders, the company reported revenue of $13.1 billion, far below analysts’ expectations of $14.5 billion. As a result, while the Dow Jones Industrial Average (DJIA) has climbed over 10% since the beginning of July, MSFT has been trading flat. When you consider the fact that stock prices are supposed to be predictive, it seems that investors may have missed the ball with MSFT.
Microsoft attributed its soft sales to weakness in the business PC and server hardware markets. However, when PC-maker Dell reported its earnings on August 22, CEO Michael Dell made a very interesting observation: most PCs are still running on Windows XP – an eight-year-old platform. As these machines and their software age, the associated maintenance costs rise exponentially. Furthermore, Windows 7 is going to be released on Oct 22. At the time of this latest earnings announcement, MSFT had already deferred $276 million from pre-sales of this software, towards the high end of their guidance. They expect to defer between $1.1 and 1.3 billion over the next quarter, all to be recognized in Q2. Is it worth the hype? Well, Windows 7 is powerful software. Long revered in tech circles, blogs Gizmodo and CNET rave and gush over the sleek new OS, one referring to it as the OS “Vista should have been.” Taking into account cost considerations, the Windows 7 release and the anticipated Office ’10 release, businesses are going to have a major incentive to upgrade their IT systems in 2010.
What has been most impressive throughout this recession is Microsoft’s ability to stay nimble and cut costs. In 2009, MSFT scaled back spending $3 billion over their original 2009 guidance. Included in this number are 4th quarter costs that were $800 million below low-end estimates provided in Q3. For the 2010 fiscal year, the company predicts operating costs of between $26.6 and 26.9 billion versus their April estimates of $27.4 billion. If the market continues to undervalue MSFT, one might consider placing a nice bet before the next quarter’s numbers come out.