Microsoft (NASDAQ:MSFT) getting plenty of comments following analyst briefing yesterday.
- Cowen notes that while management did not surprise investors with spending plans at yesterday's analyst meeting, management tempered revenue expectations around Vista. Firm believes retail upgrades (FPP) may be the issue, as well as some analysts that have aggressive assumptions around Vista SKUs. Firm has tempered their FPP assumptions but left their other assumptions unchanged. Firm expects the market to react negatively, but they don't believe investors should change long-term assumptions that drive the core business. These trends all continue to look positive. Firm sees 10-15% upside vs. the market over 12 months.
Firm says bears will argue that management tempering investor expectations around Vista within two weeks of launch is a red flag. With many investors looking at Vista as a catalyst, tempering of expectations could remove this catalyst.
Firm's view is one of less concern. There isn't likely enough information, even at Microsoft's fingertips, to predict how Vista will play out in FY08. Firm looks towards better visibility into PC unit dynamics, uptake of premium SKUs and developing world attach, all of which have the potential to add a positive bias to numbers. The company has a pattern of setting very reasonable expectations and then overachieving and firm believes the risk of further numbers correction is now out of the way.
- Goldman Sachs says they are more optimistic on PC unit growth/Vista demand for 2008 than implied by management guidance, which they view as conservative and setting the bar low for 2008. They are also assuming higher spending on customer acquisitions than assumed by management guidance, although their EPS appears about inline with management's comments. Firm believes this meeting, while characteristically cautious in tone, preempts the normal April guidance and likely alleviates investor apprehension that might otherwise overhang the stock in anticipation of the April guidance. Upside for the stock will likely need to come from better than expected consumer PC/Vista demand.
- JP Morgan says Vista commentary was not as bad as first sounded. Mgmt. noted that some analyst forecasts for Vista were too high, which was certainly not what most people wanted to hear at the outset of a product cycle-and the 2% pullback in the aftermarket reflects that. At a high level, mgmt. is generally conservative at the start of a year with guidance-and MSFT is trying to set a low FY08 bar. It is also important to note that Ballmer seemed comfortable with a modest lift in PC growth this year, which is not in firm's current forecast of 8% unit growth vs. guidance of 8-10%.
It does not appear that mgmt. is comfortable with the assumption Vista units accelerate in FY08, and firm's $16.5B rev. estimate is based on 9% unit growth vs. 8-10% guidance this year. More importantly, firm raised their numbers on Wed. to reflect the revenue recognition change which mgmt. is not considering in its comments, and it added $600M to our model-with the change, it appears consensus for FY08 is achievable.
- BofA notes that while mgmt's attempt to temper Client growth expectations could potentially cause some weakness in the shares today, they believe the more important takeaway was the very reasonable op-ex forecast for FY08, which was below most Street expectations and more than makes up for any modest trim to Client revenue growth expectations, in their view.
Firm would be buyers on any pullback in the shares this morning, as they continue to see room for upside vs. their FY08 earnings forecast, due to the combination of the company's strong product pipeline and reasonable spending intentions.
Notablecalls: Think BofA is right about the stock for today. Any gap down will probably be reversed as Ballmer being cautious is not too surprising and Street estimates are staying put.