Instant view: Microsoft, Amazon profits leap but shares slip

SAN FRANCISCO (Reuters) - Microsoft Corp MSFT.O posted a better-than-expected 35 percent jump in quarterly profit, lifted by sales of Windows 7, but its shares fell more than 4 percent as investors looked for more from a recovering technology sector.

And Amazon AMZN.O posted a 68 percent surge in net income that blew past estimates, but its revenue and income outlook failed to impress Wall Street and its shares fell 6 percent.




“From an earnings standpoint, results were slightly ahead of expectations given strong PC results, with Windows up 28 percent. I think this quarter is a good indication that the Windows 7 cycle is going well. This is good early success in the new product cycle. We expect this to gain momentum going forward.

“The real benefit for Microsoft will be not necessarily when consumers buy PCs but when businesses step up to the plate and start buying PCs, 10,000, 20,000 and 30,000 at a time. That’s when it really starts helping Microsoft more, because business PC purchases typically bring more profitability for Microsoft, because they get a more professional version of the product. So over the coming years, we see a stronger business PC refresh cycle, given most businesses have aged PCs.

“We don’t think that the true, full-scale business recovery is priced in the shares yet. The stock is down a few percent after-hours given the strong run-up over the last few weeks, with heightened investor expectations given the strong PC numbers. With shares 14 times next year’s earnings, we think there’s still good upside, especially as businesses start upgrading their PCs.”


“The third week after the end of the quarter is when you transition from buying earnings reports to selling the news. And I think we’re there.

“Amazon and Microsoft are perfect examples of companies that are going to see selling on the news. It’s part of the process. These stocks are not on their lows, they’re on their highs. You have to look at this as being a signal that we are near the end of what counts in terms of earnings.”


“The thing I’m impressed with is, that Microsoft said that it will control the purse strings and try to bring expenses in, and it appears they have been able to do that for a couple of quarters now.

“They have higher gross margins. That’s probably the biggest thing, the gross margins. And their guidance going forward shows that they are again lowering their cost structure. It says that they got the message, that they need to spend less while creating the same high-quality products and retaining their customers to be a more profitable company.

On unearned income, “that looks like it was a bit light. But that can be lumpy. That’s generally the corporate enterprise licensing. You can’t all the time look year-over-year for that.

“That’s what the company needs to explain on the call: what is happening to unearned income. The whole risk is, is Microsoft retaining its customers or are they going over to free products, the cloud, Google’s $50 answer to Microsoft products.”


“It seems like the Windows business continues to do fairly well.

“The other thing to highlight is that the company did take operating expense guidance lower.

The stock is down “likely because of slightly lower deferred revenues. Not as much as the Street was expecting. That would be indicative of whether enterprises were willing to spend more and sign on to long-term annuity contracts.

“It’s light by a small margin.

“The broader economy is not great either, so you have to take that into perspective. There’s also some seasonality to it. Typically in the third quarter, it (deferred revenue) does tend to be down a bit.”


“Microsoft had a good quarter. I think it was to be expected given the strong PC shipment numbers we’ve seen. How Microsoft fares the rest of the year is really going to depend on the pace of the corporate PC refresh cycle. I definitely think it’s coming. How strong and how fast is still up for debate.

“It’s pretty much what I was expecting. A lot of people, after seeing PC shipment numbers and other companies report..., expected Microsoft to have a good quarter.

“Microsoft is now trading right around my fair value.

“Maybe people’s expectations were a little bit higher than Microsoft’s numbers. Tech earnings have been pretty strong, and with lots of strength in the PC market, the stock has come up quite a bit recently, so it might be people having too high expectations.”


“What these numbers reflect is that enterprise and IT spending is coming back. Their product cycle of Windows in the enterprise as well as Office 2010, we are hearing that companies are getting excited about that.

“Longer term, you have people concerned about the cloud computing space and the threat it poses. If you look at the dynamics that’s happening now out in the market, they’re discounting like crazy on deals to gain market share. It’s definitely something that’s going to put pressure on their margins going forward.

“They are spending a lot of money in some of the divisions, via discounting, via trying to basically acquire customers, to gain market share.

“Definitely a solid quarter. The new products should bode well for them. It’s just the margins that I’m concerned about for them in the long term.”



“The results are fine. But from an investor angle, this was not a blowout monster quarter.

“We all knew there was strength in the consumer. That was pretty clear from the results out of Best Buy and the offline retail same-store sales numbers” in March.

“The investor expectation was, ‘hey you know, we have so much pent-up consumer demand, we are really going to see that ...unleashed this quarter. That happened to a degree, but didn’t happen to the degree that made people go ‘wow.’

“And when you have a stock that’s trading at 46 times earnings, that is treble the valuation of Wal-Mart, you need to put up significant upside.

“During the down-cycle, Amazon had tremendous leverage over its suppliers... We saw costs of revenue for the firm pick up on a year-over-year basis by 60 basis points.

“If you are going to play the recovery, you have to remember that it is going to work both ways. The cost of revenues is also likely to pick up. They are not able to make as much money on the backs of their suppliers.”


“Everything was pretty strong on the topline. Looks like gross margin was a little softer than expected.

“They are still showing very strong momentum in terms of sales... Looks like their guidance was generally in line. Obviously, the stock is trading off a little bit. I think expectations were pretty high.”

“Maybe the margin pickup that you had seen...over the last couple of quarters wasn’t there quite as much.”


“The fact that operating income (outlook) has a much lower range to it is the key driver of the downside here after the close.

“With Amazon, I would not call a 2 percent move overly pessimistic. We can routinely see this stock move in double digit percentages when all is good, or not.

“In this case, what we have is a very solid first quarter, but it looks like margins compressed... So that might be a concern going through the rest of the year.

“The company has a tendency to outperform guidance so I think that’s the reason we’re not seeing more of a move.”


The share drop “has to do with guidance. The company provided guidance on the operating income level for the second quarter. I think it’s just early reaction to that ahead of the call.

“In Q4 you had strong operating margin performance, Q1 they repeated that performance, and now for the Q2 they’re indicating that operating income is only $220 (million) or $320 (million). If I take the upward range of that and take it with the upward range of the revenue they gave, you come up with a very small number. I think that’s what the reaction’s to.

“I don’t think it’s a warning because the sales number they’re providing for Q2 is more than what the Street was looking for. They’re probably spending somewhere. That’s probably what it is.

“The sales performance was much higher that usual for Q1. That was a big standout.”

Reporting by Alexei Oreskovic in San Francisco, Lisa Baertlein in Los Angeles and Phil Wahba, Ed Krudy, Ritsuko Ando and Dhanya Skariachan in New York