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Tech Check
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To say that Microsoft's [MSFT
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] pre-market earnings release this morning took some on the Street off guard is the understatement of the earnings season. It was shocking, and poses some major credibility issues for the company that will surely come up on its conference call at 11am EST.
The company earned 47 cents a share, or two pennies shy of expectations, on $16.6 billion, which missed consensus by more than a half billion dollars, and fell below Microsoft's earlier expectations by a staggering $900 million. One Microsoft insider characterized the quarter as "horrible, at least for us." At the same time, Microsoft also announced the first layoffs in the company's history which will cost the company 1,400 jobs immediately, and another 3,600 over the next 18 months for a total cost savings of $1.5 billion.
Cutbacks were widely expected, and as I reported, just about everyone expected job cuts. While Microsoft had considered a broad layoff, I was told those plans were then taken off the table with the company preferring to make the cuts through attrition and the non-renewal of contract employees. While a layoff was still under consideration, it seemed pretty clear that Microsoft was moving in another direction. However, when it became clear over the past two weeks that business indeed was stalling far faster than anticipated, that the company would be reporting an earnings miss, and that these conditions would persist for the foreseeable future, the layoff plans made it back onto the front-burner. The clouded financial picture will likely continue, Microsoft says, which means the company will also cease to offer any meaningful guidance, which took Wall Street by too.
In a note to employees, obtained by CNBC, CEO Steve Ballmer wrote, "In response to the realities of a deteriorating economy, we're taking important steps to realign Microsoft's business." He says that during the second quarter, the company reduced operating expenses by $600 million, but that "now, we need to do more." Along with the layoffs, Microsoft will also curb travel expenditures by 20 percent, and "make significant reductions in spending on vendors and contingent staff." The company is also scaling back expansion plans and eliminating merit increases for fiscal year 2010.
He writes, "The decision to eliminate jobs is a very difficult one. Our people are the foundation of everything we have achieved and we place the highest value on the commitment and hard work that you have dedicated to building this company. But we believe these job eliminations are crucial to our ability to adjust the company's cost structure so that we have the resources to drive future profitable growth."
The company has its work cut out for it. Key units sorely underperformed this past quarter. The company's Client revenue, expected to be in the range of $4.34 billion instead came in at $3.982 billion. Server business was surprisingly good, beating admittedly optimistic expectations of $3.6 billion by $100 million. The online unit again disappointed, reporting $866 million versus the $923 million anticipated, and another key reason why Microsoft must do something with Yahoo if it stands to have any chance with an online strategy that could work. The company's Business Division also under-performed, reporting $4.8 billion when most were looking for something around $5 billion instead. Xbox, as mentioned, reported $3.1 billion though Brendan Barnicle at Pacific Crest Securities thought that figure, good as it was, should have been closer to $3.5 billion.
Many of you have already written in, asking why we seem so down on Microsoft for this report, and the reasoning is pretty simple. The company knew that business was slowing, and significantly and chose not to pre-announce. Also, some of you have suggested that all this bad news was clearly baked into shares since they're trading far below the $28 price they enjoyed in August. Fact is, with a 9 percent sell-off this morning, it's clear that the bad news wasn't baked in. This is all about expectations. Microsoft's numbers, for any other company, are phenomenal. But in a market based on expectations, you either meet 'em, beat 'em or miss 'em. Never mind how you compare to others. And we're seeing Microsoft pay the price this morning.
Questions? Comments?
Data is a real-time snapshot *Data is delayed at least 15 minutes