After a string of sunny earnings from Apple (AAPL), Intel, and other tech companies, Microsoft's dreary fiscal fourth-quarter results reported July 23 threaten the rising sense of optimism that a recovery in technology spending is at hand. "They kind of spoiled the party," says Brent Thill, director of software research at Citigroup (C) who has a buy rating on Microsoft shares.
Microsoft's (MSFT) net income fell 29% and sales dropped 17% for the quarter ended June 30. Both missed Wall Street's expectations, and investors sold Microsoft shares in extended trading, pushing the company's stock price down by as much as 8%. The report came after a trading day in which stocks rallied on strong corporate earnings in recent days, and Microsoft's stock had closed up 76¢, or 3%, at 25.56. Amazon.com (AMZN) also reported disappointing earnings after the close on July 23.
Hopes for Rebound Recede
The tech market had been caught up in a wave of optimism after chipmaker Intel (INTC) issued a strong third-quarter forecast July 14, and Apple on July 21 exceeded Wall Street's expectations for second-quarter sales. EMC (EMC) and Texas Instruments (TXN) have also issued positive earnings reports.
Investors have hoped that technology spending by consumers is rebounding, and that tech stocks would enjoy an extension of the rally they've had since March. "That belief has been shattered," says Yun Kim, an analyst at Broadpoint AmTech, which has a neutral rating on Microsoft. Instead of buying into a rally that's seen the Nasdaq Composite Index climb 55% since Mar. 9, investors will need to closely evaluate the specifics of companies whose shares they own. "Investors need to be a little more careful about analyzing each individual stock and not riding the market sentiment," Kim says.
Weak sales of PCs and servers took their toll on Microsoft's business during the quarter. Revenues were $13.1 billion, vs. $15.8 billion a year ago, and well short of Wall Street analysts' consensus estimate of $14.4 billion in fourth-quarter sales. Net income was $3.05 billion, or 34¢ per share, down from $4.3 billion, or 46¢ per share, last year. Analysts had expected Microsoft to earn 36¢ per share. Still, company officials said there are reasons to believe the economy is stabilizing. "At least we are seeing signs now of the bottom," Chief Financial Officer Chris Liddell said during a conference call with analysts.
Stumbles in All Divisions
For the latest quarter, however, Microsoft felt pain across all its divisions. Sales in Microsoft's Windows group, which closely mirror PC sales, tumbled 29%, to $3.1 billion. PC shipments worldwide declined 5% during the second quarter, according to market researcher Gartner (IT). Businesses are waiting for Windows 7, the next version of the operating system due Oct. 22, before they buy new machines.
