|* MSFT $27.20~$28.50 Questions Linger Despite Microsoft's Strong Results |
By Ronna Abramson
TheStreet.com Staff Reporter
01/23/2004 10:51 AM EST
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Updated from 9:47 a.m. EST
Analysts remained upbeat about Microsoft (MSFT:Nasdaq - commentary - research) Friday, saying stronger-than-expected 19% revenue growth in the fiscal second quarter should outweigh a disappointing decline in deferred revenue, as reported by the software behemoth after the close Thursday.
Similarly, after digesting the numbers a little more -- particularly the larger-than-expected $395 million drop in deferred revenue -- investors seemed to be more encouraged by the results. After declining in after-hours trading Thursday, Microsoft shares rebounded Friday, climbing recently 73 cents, or 2.5%, at $28.74.
"Taken collectively, the true picture of what is happening with Microsoft's unearned revenue is perhaps less troublesome than most think," Deutsche Bank analyst Brian Skiba wrote in a note Friday. A near- to mid-term drag on the stock should be a buying opportunity for long-term investors, said Skiba, who has a buy rating on Microsoft. (His firm has not done banking with Microsoft.)
Piper Jaffray analyst Gene Munster agreed investors should ignore any Street frustration with the decline in deferred revenue. By his calculations, Microsoft's sales bookings increased 18.4% year over year, only modestly shy of 19.5% growth needed to hit the general consensus estimate for deferred revenue.
Multi-year subscription sales to large enterprises remain robust, added Sanford C. Bernstein analyst Charlie Di Bona. Rather, it's in the small business market where they are weaker, resulting in the decline in deferred revenue. However, he believes that market is instead buying standard licenses. That would explain upside to the topline on the income statement. Di Bona has a buy rating on Microsoft and his firm's parent company, Alliance Capital, holds Microsoft shares.
"It's not because the [subscription] model stinks," Di Bona said. Rather, for various reasons, small businesses likely prefer to buy software as they needed it rather than as a multi-year subscription.
Di Bona's comments echoed the explanation offered by Microsoft management Thursday in a post-close conference call Thursday. "We are very pleased with our first $10 billion quarter," CFO John Connors said on the call. "We feel good about where we ended the quarter on unearned" revenue.
Redmond, Wash.-based Microsoft reported net income under generally accepted accounting principles of $1.55 billion, or 14 cents a share, in the second quarter, which includes a stock-based compensation charge of 20 cents a share. Of that charge, 14 cents a share was related to the company's unique stock option-transfer program with J.P. Morgan.
A year ago, Microsoft posted second-quarter net income of $1.87 billion, or 17 cents a share, which includes stock-based compensation charges totaling 7 cents a share, as well as other charges and a one-time tax benefit.
Excluding charges, including stock-based compensation and a one-time tax benefit, Microsoft recorded pro forma net income of 34 cents a share in the second quarter, compared with 26 cents a share on a split-adjusted basis a year earlier. Analysts polled by Thomson First Call were expecting the company to post pro forma earnings of 30 cents a share, the higher end of the company's target range of 29 cents to 30 cents a share for the second quarter ending in December.
Second-quarter revenue rose 19% to $10.15 billion from $8.54 billion a year earlier, and 23% from $8.22 billion in the previous quarter. That soared past the consensus estimate of $9.74 billion for the second quarter, roughly the midpoint of the company's targeted range of $9.7 billion to $9.8 billion.
"Consumer and corporate demand for PCs continued to exceed our expectations and resulted in solid double-digit revenue growth for Windows XP and Office products," Connors said in a press release. "In the second quarter, the overall corporate IT market also began to show signs of a recovery, with increased demand for both desktop and server products."
Investors received a hint that Microsoft might benefit from strong PC sales earlier this month when Gartner and IDC said fourth-quarter PC sales grew 12% to 15%. Microsoft registered 12% PC unit growth and 13% server unit growth and raised its forecast for PC growth in fiscal year 2004 to the low double digits.