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Update Microsoft (MSFT)
03/18/2010 12:33 pm EST
The really good news for investors was what wasn’t in the blowout numbers. And what’s happened to the company’s business since then.
The second quarter results were good enough on their own. (Microsoft’s fiscal year ends in June.)
The company reported earnings of 60 cents a share. Once you added back in $1.7 billion in deferred revenue and about 14 cents a share in earnings from sales of Windows 7 that Microsoft decided it would recognize in future quarters the earnings picture looked even better at 74 cents a share. Wall Street analysts had included that deferred revenue in their estimates of 59 cents a share for the quarter. That made this is a 15 cents a share earnings surprise.
The company attributed the surprise to better than expected sales of its new Windows 7 and Windows Server 2008 R2 software launched in October. Through the second quarter Microsoft had sold 60 million Windows 7 licenses, making it the fastest selling operating system in history, according to the company.
But what’s really interesting for investors who want to know not what Microsoft did in the quarter but what the stock might do going forward is that the company reported it still hadn’t seen a significant contribution to sales from corporate—known as enterprise—purchases of Windows 7.
Pretty much all the strength through the end of 2009 had come from consumer purchases. In fact booked sales in the key enterprise business of servers and tools were flat and business division sales actually declined 5%.
When will those enterprise sales kick in? It looks like this is a story that will begin in the second half of calendar year 2010 and then really build up speed early in calendar year 2011.
By early March Wall Street analysts were reporting that their checks of sales channels showed significantly more companies signing up to beta test Windows 7. (No company in its right mind buys a new operating system until it has a chance to see how it runs with existing applications software.)
The stock actually sold off big on the day after the earnings announcement and then continued down until it hit a bottom, along with the rest of the market, on February 8.
I suspect the rebound since then is one part general market recovery, one part buying by value investors who like the long-term story (if 2011 is considered long-term) and one part Google/China hype. Wall Street has been abuzz with speculation that Google’s (GOOG) potential departure from China will be a boon to Microsoft, which has struggled to gain traction in China’s huge Internet search market. The buzz got louder with the news that Microsoft has, according to the Wall Street Journal, hired three people from Google’s China unit.
Interesting to speculate about but I’d rather put my money on an increase in sales to corporate customers. As of March 18, I’m raising my target price to $36 a share by October from the prior $33 by June.
Full disclosure: I own shares of Microsoft in my personal portfolio.
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