One on One with Brendan Barnicle, Software Analyst, Pacific Quest Securities
Thursday, January 25, 2007
|
|
|
|
SUSIE GHARIB: Microsoft was among the stocks that fell today, but its shares rebounded as much as 3 percent in after-hours trading on better-than-expected quarterly earnings. The world's largest software maker earnings $0.26 a share in its fiscal second quarter, $0.03 more than estimates. Revenues also rose more than expected to a record $12.5 billion, thanks to strong sales of its Xbox 360 game console during the holidays.
The results would have been even better, but the company was forced to defer sales and profits because of the delayed launch of its new Vista operating system. It's scheduled to be released to consumers on Tuesday, and the company is counting on it to drive growth this year. That's one reason Microsoft today boosted its full year earnings estimates to between $1.45 and $1.47 a share. Joining us now for more analysis on those Microsoft earnings, Brendan Barnicle, software analyst at Pacific Crest
BRENDAN BARNICLE, SOFTWARE ANALYST, PACIFIC CREST SECURITIES: Hi, Susie, how are you?
GHARIB: OK, great. Give us your reaction to today's numbers, both earnings and sales from Microsoft.
BARNICLE: The earnings and the sales numbers were very encouraging. They had strong results really driven by better-than-expected results out of both Xbox and the office business. And the office strength is particularly encouraging for the new launch of Office 2070. On the earnings side, we also saw a little bit of upside on lower than expected marketing expenses. So the current quarter results were very encouraging. As we look to the guidance, that was pretty much just in line, so really not a whole lot exciting there. On the call tonight there were a lot of questions about why they weren't being more optimistic about their products going forward. And while they are optimistic about them, they're certainly not giving us that in the numbers yet. And we expect they probably do get some upside from those new products, but the company certainly isn't willing to put that out there yet, so a little bit of disappointment that we didn't get higher guidance.
GHARIB: But what is your view on this, because Microsoft is always conservative on guidance. Is this still going to be the big driver that everyone is expecting it to be?
BARNICLE: You know, we're kind of skeptical on Vista as well. I think the approach the company's taking is the right one. As they rightly pointed out on the call, this isn't Windows 95 again. This isn't a dramatic new system with sub-$1,000 PCs. This is just a further evolution of the industry. While there certainly is some pent-up demand we think on the consumer side, we certainly have seen a decent start to it on the business side, we think it is going much the same growth that we see in the PC cycle. And that Vista itself isn't necessarily going to accelerate that growth at all.
GHARIB: You said that even though this has gotten rave reviews, one of the issues from the Microsoft is whether consumers are going to switch out of PCs all together and buy an Apple.
BARNICLE: That could be a very big issue. That is a very big issue. Microsoft one of the big things about this is they are taking in many of the attractive features from Apple and incorporating them into Vista as a way to try and be more competitive. But Microsoft continues to have the same security issues with Vista. We've heard about those already that they continue to have in the (INAUDIBLE). So we think they're going to continue to have some issues there. In the call tonight they were asked about when we might see the release of service pack one. Some people have predicted it maybe as early as this summer. Typically we don't see a service pack release for a full year. But given some of the security issues that have already surfaced in Vista, they may have to bring that forward a little bit sooner in order to make sure that we continue to see the follow-through in sales of Vista.
GHARIB: Let's get your quick analysis on the stock. It did do rather well in after-hours trading. It got up by three percent or so. I understand you have a neutral rating on the stock while others on the Street are much more upbeat. Tell us why you are so conservative on the stock?
BARNICLE: Well, the stock has had a tremendous run this year, off the summer lows at about $22. It has had a huge run, probably one of the best runs Microsoft has had in several years. And we just don't see a lot of near-term additional upside. Even if you look at the most bullish estimates that are out there, analysts are thinking maybe the stock makes its way to 35, $36. That is only really less than 20 percent from here. For us to really recommend a stock, we would like to see significantly more than 20 percent potential upside, even if it is something like Microsoft.
GHARIB: Brendan, do you own the stock or does your firm have any kind of investment banking relationship with the company?
BARNICLE: I don't, Susie. We don't have any relationship with the company.
GHARIB: OK, great. Thank you so much for coming on the program.
BARNICLE: Thank you.
GHARIB: We've been speaking with Brendan Barnicle, software analyst at Pacific Quest Securities.
