Friday, September 20, 2013

Microsoft Analyst Day: The Good, Bad and the Ugly

The good, bad and the ugly were all on display at Microsoft's 2013 Financial Analyst Day.  I didn't have the stomach for the whole shebang, but looked through COO Kevin Turner's slides and listened to part of the Questions and Answer session before succumbing to reading the transcript.

The good stuff is not new, and it all appears in Kevin Turner's slides. The issues for concern are in the behavior, body language and interactions among the COO, CFO and CEO that are evident in the video of the question and answers.

I was surprised by the amateurish character of  the whole setup for a global technology industry leader. How can they help their customer companies do better when they can't even run an important corporate presentation for themselves?  Despite all the remote mikes, a webcast viewer can never hear the questions from the audience.  The transcripts reflect gaps by saying "Off mike," when they can't pick up the speaker. How 1980's!  The lighting is out of balance, poorly placed and gets so bad at one point both the CFO and CEO put their hands over their eyes to look out into the audience.

For a small cap company, this is trivial; for Microsoft at an equity market capitalization of $273 billion, this is just inexcusable and, worse, inconsistent with their image and messaging.  Indicative, but small.

Here is the first question in the Q+A:

"QUESTION:  (Off mike.)  Just a real quick question for Amy, the $6-1/2 billion of CAPEX that you have for Fiscal '14, obviously a big step up from previous years, is that a one-time step up and then back down, or is that a sustainable level for the next several years?

AMY HOOD:  Well, what I would say is that if you're in the devices and services business and you're successful, I would hope that we continue to need to invest capital to build out the infrastructure and the server capacity over time.  So that's how I would think about it."

Simple question.  In fact, to open a session, it's clearly a softball, pitched for the CFO to hit it out of the park. This is the role of the first questioner who wants to do the company a favor.  The answer is not only non-responsive, it makes no sense.  The first thing to do is to reject the "one time" argument as this would make no sense either.  After that, some general comment about a range for the representative level of capital expenditures in the coming years, without making a forecast, would suffice.  Or, to work off the COO's slides, "Look we're pursuing a $181 billion market opportunity in cloud computing, and you see how fast we're already booking business from Kevin's slides, so we'll commit to higher levels because we already see the returns from that business."  

We have expressed concerns about the incumbents in the CFO chair before, and based on what we see and here in this exchange, it is still a real issue for shareholders.  The CFO has to be a strong personality, and shareholders look to that chair as a counterweight to overly optimistic, aggressive CEOs who are expected to be over the top.  The CFO has to make sure that the shareholders' money and interests are well protected.  Here's the flip side of the problem from an extremely loud and overcaffeinated Steve Ballmer. 

"STEVE BALLMER:  I don't know what really happens in all the telecom companies, but at least the myth of the telecom companies from 20 years ago, we should make the investment, huge CAPEX, and then it all goes away, success as Amy said breeds new CAPEX here.  There's no sort of point of saturation if our customers continue to buy more stuff from us.  We would consider that a first rate problem."

Talk about making no sense! Who cares about telecoms from 20 years ago?  Did Amy say "success breeds new capex?"  Capex of $6 billion is not any kind of "problem" for a company with no net debt and $75 billion in cash: that wasn't the question.  It was a softball question for an analyst modeling free cash flows for the next few years.  Mr. Ballmer stepped in with both feet because he didn't like his CFO's answer, but the trouble is, he made it worse not better.  Watch the CFO cringing as he speaks.  

Having a weak role and a revolving door of undistinguished players as CFO will be an issue for the company going forward. 

A critical question was asked in a very soft way by another analyst, and the way it was treated demonstrates the basis for our concerns expressed in a previous post.  

"QUESTION:  (Off mike.)  There is the perception that you need different types of skill sets to operate both in enterprise and the consumer business.  I guess as you see this leadership transition coming in, I guess do you feel that internally you have the skill sets to manage both a very large enterprise company as well as a very large consumer company, and does ‑‑ I guess how does that impact your view or the board's view of who makes sense to take over for you?  Thanks.

STEVE BALLMER:  I mean this is one people like to jawbone about, and I don't quite get it. We've been selling to consumers and enterprises basically since about 1985.  It used to be people thought we were better at the consumer side and worse at the enterprise side.  Now people think we're better at the enterprise side and worse on the consumer side.  I'd love everybody to say you're good at both sides, but I don't see the fundamental disconnect.  I really honestly don't feel it even in the culture of the place."

This is a problem, and will be a problem for the new CEO as (s)he struggles with the Microsoft Leviathan. Mr. Ballmer's history and biases dominating a weak board along with Mr. Gates will stand in the way of Lew Gerstner-style actions from a strong CEO.  Here's a different way of looking at the past.

Microsoft was only "better on the consumer side" because of the OS monopoly created by the WinTel axis and by the domination of the PC in the corporate workplace.  Monopolists make profits not because they're smarter, but because they don't have to compete. 

When Microsoft competed as a monopolist, their culture was not to beat any competition, but to nuke them out of existence.  They were able to do this by dint of their lockup with Intel and by the huge cash flows from the boxed software licensing business. 

Remember when Microsoft wanted to buy Quicken, the best consumer money management software by a mile?  When the regulators stopped this, what did Microsoft produce?  Micrsoft Money!  This was a terrible product even for Microsoft, and I speak as a user who abandoned ship early.  When Personal Information Managers (PIMs) first came out, there were a number of innovative products first-to-market, but somehow they all disappeared and Outlook eventually took over.  Remember Netscape?  Now we have the bloated, resource-hogging Explorer xx.  I use Chrome, which runs fast, smoothly and almost never crashes. But, Microsoft Web Apps don't play well in Chrome, so a user is often forced to go back to Explorer.  

The point is that I, as a Microsoft consumer user from the earliest days can honestly say I never have regarded them as being good at anything, but there was never a seamless alternative.  The switching of the consumer software model to Office 365 really doesn't make a lot of sense unless a home has five PCs which is probably a 1% group.  That model for consumers is not attractive.  How Microsoft does as a consumer company going forward  cannot be predicted from the past; if it were extrapolated from the past, the future would be grim indeed.  

What are some of the points from Kevin Turner's presentation?  A balanced revenue portfolio.  Good, but let the company focus, and let investors diversify their portfolios themselves.  We've talked extensively about capital allocation.  The Enterprise businesses are attractive and Microsoft may ultimately be a stronger competitor than Oracle and other established players on the software and services sides, but that is still an open question.

One of the most interesting slides from Kevin Turner's presentation is one depicting revenue from three large scale corporate customers, pre and post-cloud computing services.  It shows Office 365 and Azure customers, and the year-over-year revenue gains are on the order of 20% or better.  Again, the problem is that the sales efforts and compensation models for these businesses are quite different from the consumer businesses.  Let the Microsoft Enterprise stand alone and do its thing while creating value unencumbered by the legacy of a consumer-unfriendly culture endemic to Microsoft.  

I know that these Microsoft posts are very widely read around the world from the stats, but send me some comments because I want to know about other ideas too. 

No comments: