Microsoft’s earnings are worth a lot less than Apple’s because the Microsoft is in a growth stall that will be hard to recover from, said Adam Hartung in Forbes this weekend.
As a result Microsoft’s stock has flattened.
But there’s only one problem: Microsoft’s revenue and earnings have been growing pretty well for the last year.
Here are the basics from Microsoft’s last five earnings reports:
- March 2011 (Q3 of Microsoft’s 2011 fiscal year): Revenue was up 13% rom the previous year, operating income up 10%, EPS up 36%
- December 2010 (Q2’11): Revenue +15%, operating income +20%, EPS +28% (this is organic growth — it ignores a one-time revenue shift from Q1 to Q2 last year to account for a guaranteed upgrade program from Vista to Windows 7)
- September 2010 (Q1’11): Revenue +13%, operating income +20%, EPS +19% (again, this ignores the effect of the revenue shift in the previous year)
- June 2010 (Q4’10): Revenue +22%, operating income +49%, EPS +50%. This was largely due to the launch of Office 2010 during the quarter. So let’s go back one more:
- March 2010 (Q3’10): Revenue +6%, operating income +17%, EPS +36%. Not great — but a lot of businesses probably held off on buying Office 2007 because they knew a successor was coming out next quarter.
Hartung focuses on Windows revenue, which was down 4% on an annualized basis last quarter, and on the accompanying PC market stats, like consumer PC sales down 8% and netbooks down 40%.
But he ignores the fact that PC sales to businesses grew 9% last quarter. The business PC refresh cycle for Windows 7 is still far from finished, and Microsoft earns more per unit from business versions of Windows than it does from consumer versions.
Also, Microsoft does have businesses other than Windows. Two of the company’s other big divisions — Business (Office, Exchange, SharePoint, and other business software) and Server & Tools (Windows Server, SQL Server, and other platform software) — have had 10%+ revenue growth for each of the the last four quarters.
In addition, a lot of big enterprises buy these products (but NOT Windows) on multiyear licence agreements with annual payments. So there is often an “echo” effect in the years after a new product is released as corporate accounts pay the second and third installments. This could very well happen for Office 2010 and related products.
Hartung’s historical analysis is right: when companies stop growing, it’s very hard for them to regain growth.
And a lot of Microsoft’s recent actions do look like what he calls “Wal-Mart” tactics — it’s cutting expenses to make operating income and EPS grow faster than revenue and there have been some funny one-time tax benefits to make things look better than they actually are. Plus, it’s been slow to meet the threat from the iPad, and its newer businesses like search and mobile are doing NOTHING for the company financially.
Hartung also has another good reason to worry, which he doesn’t mention: next quarter will be the anniversary of the Office 2010 release, which means comparables will be much harder.
At that point, Microsoft’s growth may indeed turn flat.
But it’s inaccurate to call it flat now.
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