While Thursdsay morning’s news that Microsoft (MSFT) plans to cut about 5,000 jobs over the net 18 months makes for an ugly headline and further confirmation of the current economic gloom, Wall Street is convinced that the software giant is not going far enough to reduce costs. And they think that additional expense cuts - and that means layoffs - are almost surely to follow. For one thing, the company went out of its way to emphasize that on a net basis, the number of cuts will be lower; that message might have provided comfort to Microsoft employees, but it diluted the impact on the move for the Street.
There were other aspects of the Microsoft news Thursday that disappointed the Street; certainly, the financial performance for the December quarter was not that good, but that was the least of the troubles afflicting the stock. Investors are in general irritated about the company’s decision not to give forward guidance, and they are ticked that Microsoft has decided to slow down its share repurchase program. But as you will read below, there is widespread belief that Microsoft should - must - make further cuts to expenses barring a sudden economic recovery. And even CEO Steve Ballmer himself says a quick rebound is not likely to happen.
It all adds up to a company that, despite a relatively low valuation on a P/E basis, has few current fans on the Street.
Here are some excerpts from this morning’s batch of research on the company’s announcements:
- Todd Rakar, Deutsche Bank: “We were disappointed that Microsoft is only reducing its workforce by a net 2K-3K people…larger headcount reductions were warranted given the 10% year-over-year decline in bookings.”
- John DiFucci, J.P. Morgan: “The negative stock reaction may have had more to do with a head-fake regarding expense control than the weak results,” he writes. “Management discussed the need to concentrate on running the organization more efficiently through expense reductions, but net/net there were none. Operating expenses will increase in the second half from a year ago.”
- Adam Holt, Morgan Stanley: “Given the magnitude of the revenue shortfall, the 2-3K net headcount reduction and $1.5 billion in cost savings seems too small.”
- George Zwakman, Tier1 Research: “We believe investors are struggling with what we view as signs of complacency…the company has pulled back on some expenses and is doing some layoffs, but those are minimal efforts relative to the scale of the once dominant firm.”
- Robert Breza, RBC Capital: “We question if the cuts were deep enough…We wonder if MSFT is doing enough to protect earnings when other large software vendors are reducing headcount 4%-8%.”
- Walther Pritchard, Cowen: “In our view, the cost-cutting doesn’t go far enough.”
- Brad Reback, Oppenheiner: “The real issue remains expense controls,” he writes. The moves to date, he writes, don’t go far enough in light of expectations of future demand. “We also take issue with the potential slowing of its buyback efforts given its current cash flow.”
- David Hilal, Friedman Billings Ramsey: “We think MSFT should, and may end up cutting deeper as the downturn persists.”
- Brent Thill, Citigroup: “With a business rebound unlikely until the [second half of FY 2010] and with revenue mix shift pressuring margins, further expense reduction initiatives over the next few quarters are likely. We view [yesterday's] expense announcement as only Round 1.”
- Heather Bellini, UBS: She blames the stock’s fall yesterday on the company’s decision to pull guidance. But she also maintains that on a relative basis the stock is “one of the better places to hide.”
- Sarah Friar, Goldman Sachs: “The suspension of financial guidance and management commentary about the re-setting of economic activity to a sustained lower level underscores our view that we are only just entering the worse of the downturn for IT vendors.”
- Kash Rangan, Merrill Lynch: He says that the company could have cut another 5,000 jobs from its online segment, which he estimates has 20,000-30,000 employees - that would be at least as many as Google’s roughly 20,000, by the way - but that the company sees online as an area of continued investment and a franchise potentially as large as Windows.
- Israel Hernandez, Barclays: He views the $1.5 billion in expense reductions as a “disappointment in light of rapid deterioration in revenue growth.”
- Yun Kim, Pacific Growth: “Investors are likely to question whether the company is reducing its operating expense enough to properly align its cost structure to its lower revenue run rate and also its decision to slow its current share buyback efforts.”
- Sid Parakh, McAdams Wright Ragan: He says the announced cost cutting moves “do not go far enough and lead us to believe that the company is de-emphasizing margins in the near-term, inflaming investor concerns.”
- Sean Willis, Caris & Co.: He writes that the “lack of buyback activity” is “a major disappointment and undercuts a major earnings assumption.”
MSFT, which fell $2.27 Thursday, Friday rebounded 9 cents, or .5%, to $17.20.