Microsoft Corp. said Thursday that declining PC sales hurt revenue, as the software giant reported quarterly sales that fell for the first time in its 23-year history as a public company.
The Redmond, Wash.-based company said sales fell 6% from a year earlier to $13.7 billion, missing analysts’ expectations of $14.1 billion.
Meanwhile, the company’s net income fell 32% to $2.98 billion, or 33 cents per share, in its third quarter ended March 31.
Results included charges totaling 6 cents per share for job cuts and investments that took place in the quarter. Without the charges, Microsoft earned 39 per share, in line with forecasts by analysts polled by Thomson Reuters, which typically exclude one-time items.
Microsoft said weakness in the global PC market negatively impacted its results.
Still, shares of Microsoft (MSFT, Fortune 500) rose 4% after hours, as the company performed roughly in-line with expectations. In the previous quarter, results came in well below forecasts, and Microsoft rescinded its prior outlook for 2009.
"Expectations were much more tempered now," said Katherine Egbert, analyst with Jefferies & Co. "People now understand that near-term business won’t be so good."
On a conference call with analysts, Chris Liddell, Microsoft’s chief financial officer, said the current recession has been "the most difficult economic environment we’ve faced in our history." He noted that he expects the recovery to be slow and gradual, but again he declined to give a specific outlook for the next three-month period.
Still, Liddell said he was encouraged by the company’s ability to cut costs.
"While I can’t be happy in any quarter in which our revenue and earnings per share decrease, I’m pleased with our relative performance," he added.
Demand quagmire: The company has had a difficult time combating slumping demand for its Windows operating system, as the economic slowdown has dragged PC sales down 7% to 9%, according to Microsoft’s estimates.
The recession has also prompted many consumers to opt for cheaper, scaled-down "netbooks" that perform only basic tasks such as e-mail and accessing the Internet. They typically run a lower-cost version of Windows or an open-source operating system such as Linux.
"The trouble for Microsoft is that its cash cow is shifting," said Carl Howe, analyst with Yankee Group. "PC sales are troubled, and they’re getting hurt by the move to cheaper notebooks."
In January, Microsoft announced its first mass job cuts in its 34-year history in an effort to bolster its bottom line The company slashed 1,400 position during the quarter with another 3,600 expected to be cut by mid-2010 instant payday loans completely online. At that time, the company said it was also adding a few thousand positions, mainly in its online advertising division.
"While market conditions remained weak during the quarter, I was pleased with the organization’s ability to offset revenue pressures with the swift implementation of cost-savings initiatives," said Liddell. "We expect the weakness to continue through at least the next quarter."
Sales and profit fell in all of Microsoft’s businesses, except its server business, which managed to squeeze out a 7% rise in revenue and a 24% jump in earnings. The entertainment and devices division, which includes the Xbox 360, suffered a 2% revenue decline and an operating loss of $31 million from a year earlier. The company’s business division sales dropped 5%.
Windows: The company is banking on a new operating system to break out of its slump.
Microsoft’s Vista operating system, which was released in early 2007, never took off like the company had hoped. Sales in the division that produces Vista fell 16% in the previous quarter. User satisfaction has been underwhelming, and IT departments have largely opted to stick with Vista’s predecessor, Windows XP.
"Microsoft can’t point to anything in their mix of products that excites people right now," said Allen Weiner, analyst with tech consultancy firm Gartner Research.
Early reviews of Microsoft’s new Windows 7 system have been largely positive, but the stated release date isn’t until late early 2010. Analysts think that Microsoft will push up the release date to later this year to help spur PC sales around the holiday season. The company expects the unveiling of its new operating system will help increase sales even if economic conditions remain challenging.
Online advertising funk: Microsoft has also continued to struggle to compete with rivals Google (GOOG, Fortune 500) and Yahoo (YHOO, Fortune 500) in the online advertising business. Microsoft’s Online Services division, which includes the online portal MSN and its Internet advertising sales, lost $575 million in the quarter, and sales in the division were down 14% from the same quarter a year earlier.
Microsoft said the loss in its ad sales division was due to the significant decline of average rates in display advertising.
A bailout oversight committee on Tuesday asked Treasury Secretary Tim Geithner to explain the agency’s handling of the controversial $700 billion bailout program.
Congressional Oversight Panel Chairwoman Elizabeth Warren, a Harvard University law professor, stressed the need for more transparency and accountability.
"People want to see action described in terms that make sense to them and that seem fair," she said. "They want to see that taxpayer funds aren’t being used to shield financial institutions from the consequences of their own actions."
The hearing marked the first time Geithner has publicly appeared before the panel, which was established as part of the Troubled Asset Relief Program passed by Congress last October at the height of the global financial panic.
Geithner mounted his strongest defense of Treasury’s actions over the past few months, as the agency has become the target of several critical oversight reports.
"We are not a private investment firm, we are the government of the United States. When we act, we don’t do it for the benefit of those banks," he said. "You can’t look at … the narrow prism of the transaction itself. You have to look at the broader benefit it takes."
Warren has been particularly critical of Treasury in the past few months on behalf of the five-member oversight panel.
Her often biting criticism of the government’s handling of the bailout hasn’t always been shared by other members. The last report the group issued was approved 3-2. One panelist, former Sen. John Sununu of New Hampshire, a Republican, accused the panel of veering off its mission.
Several panelists asked Geithner to explain how the bailout program changed course so much over the past six months, and whether it was effective.
"It is now being used to aid the automakers, which leads to the question of ‘who’s next?’ The airline industry? The trucking industry? At what point does Starbucks get in line for a bailout?" asked Rep fast payday loans. Jeb Hensarling, R-Texas.
When Warren asked why regulators appear to have treated financial firms with a lighter touch than the auto industry, referring to the replacement of General Motors (GM, Fortune 500) Chief Executive Rick Waggoner, Geithner disagreed. He pointed out that Treasury also replaced management at Freddie Mac and Fannie Mae, the government sponsored enterprises.
In addition, Geithner hinted that the administration was willing to consider such actions in the financial sector as well. Geithner said that, in the future, regulators intend to make sure those firms that need an "exceptional level" of bailout help "emerge stronger than weaker."
The panel has had impact in one respect. Last month, Warren complained to Congress that Treasury had been ignoring the panel’s requests for more detailed information. On Tuesday, Warren complimented the department and suggested it was providing far more information.
Treasury is now briefing the Congressional Oversight Panel weekly, and on Monday turned over 10,000 documents to the panel in response to a March 24 request.
"This progress is certainly encouraging, and I hope it is indicative of a change in the way your department plans to handle future requests," said Damon Silvers, an attorney for the AFL-CIO.
In a written statement, Geithner pledged to work with TARP overseers.
"Transparency will not only give the American people comfort in our stewardship of these funds, it will give the markets confidence that we are stabilizing and strengthening the financial system," Geithner said.
GlaxoSmithKline Plc, the world’s second-largest drugmaker, has agreed to buy privately owned U.S. skincare specialist Stiefel Laboratories for up to $3.6 billion, the two companies said on Monday.
The acquisition is the latest in a string of deals in the drugs sector, but is significantly smaller than recent mega-mergers, reflecting British-based Glaxo’s (GSK) declared focus on bolt-on buys to diversify its business.
Stiefel, part-owned by buyout firm Blackstone Group (BX), is the world’s largest independent dermatology company, with a range of prescription and over-the-counter products faxless payday loans.
It was put up for sale a month ago and attracted interest from a number of large pharmaceutical companies, including Novartis AG (NVS), Sanofi-Aventis SA (SNY) and Johnson & Johnson (JNJ, Fortune 500), according to people familiar with the matter.
The 160-year-old Stiefel is a maker of anti-itch creams, acne treatments and other skin treatments.
"Borrow, buy, burn. Every part of that has got to stop" is a rallying cry for John Doerr. Sadly, Doerr’s firm, Kleiner Perkins, did not consider these goals before making its investment in Terralliance Technologies. Terralliance is an oil-exploration company funded by Kleiner, Goldman Sachs (GS, Fortune 500), and others. It has burned through hundreds of millions of dollars, much of it borrowed, and now finds itself in serious trouble.
Only last summer, when Fortune featured Kleiner and its capital-intensive shift into energy, Terralliance, based in Newport Beach, Calif., was viewed as the great green hope. (See "Kleiner Bets the Farm.") At the time, Terralliance was weeks away from raising more than $1 billion at a valuation of $4.4 billion (including the new cash) from Temasek, the Singaporean sovereign wealth fund.
Kleiner’s dirtying its hands in the oil patch was something of a head-scratcher. Back then the firm had recently hired Al Gore as a partner. But money is money, oil was trading for $140 a barrel, and Terralliance was said to have developed software that reduced the risk of drilling dry holes. It looked as if Terralliance could be a moneymaker for Kleiner, which had sunk a total of $65 million into the venture, an extraordinary sum for a VC firm - possibly its biggest single investment ever.
Not even a year later, Kleiner is learning the hard way how difficult it can be to enter new sectors online cash loans. The Temasek deal never closed, and its collapse coincided with the removal of Terralliance founder and NASA alumnus Erlend Olson as CEO. As a Mr. Fix-It, Kleiner has installed Mike Long, a Doerr confidant who has previously overseen Kleiner turnarounds, including Move.com. Another investor, influential San Francisco hedge fund Passport Capital, lent Terralliance $150 million, a loan currently in technical default.
What went wrong at Terralliance is a common story line in Silicon Valley - rapid cash burn. Drilling an oil well on land (which is less costly than in the water) can cost as much as $25 million. The company has raised at least $500 million in debt and equity, most of which it has spent.
Kleiner, which recently took the unusual step of raising hundreds of millions of dollars to supplement its existing funds, declined to comment. So did Temasek, Goldman, and Olson. Oil prices at $50 a barrel can’t be helping the VC firm’s multiple eco-themed investments. Never truer are the immortal words of the great American philosopher Kermit the Frog: It’s not easy being green.
Americans are fed up with the Detroit drama.
Three out of four Americans would rather see General Motors (GM, Fortune 500) and Chrysler face bankruptcy than watch the government pour yet another round of bailout cash into the big U.S. automakers, according to a CNN/Opinion Research poll released Thursday.
While 76% of survey respondents want to see the automakers face bankruptcy, 22% are willing to prop them up with more bailout cash, according to the poll, which surveyed 1,000 Americans from April 3-5.
While GM still hopes to avoid going bankrupt, preparations for a bankruptcy filing have become "intense and earnest" at the Detroit giant, according to a source familiar with the company’s plans.
Americans are more divided on the Obama administration’s increased involvement in the way businesses and financial institutions are run. According to the survey, which has margin of error of plus or minus 3%, 42% of Americans think the Obama administration has done what it should, while 23% think the government ought to have even more oversight powers. But 35% of respondents say the government has gone too far.
One of the reasons Americans are willing to let the Big Three head into bankruptcy is that many don’t see Detroit’s woes significantly affecting the national economy.
Of those surveyed, 44% said auto bankruptcies would only cause "minor problems" for the U.S. economy. That’s an increase from December’s poll results, when 28% of those questioned said the bankruptcy effects would be minor. (For more on Detroit’s ripple effects, see "Auto bankruptcy: What it means")
But only 37% of those surveyed in April thought a Detroit bankruptcy would cause "major problems" for the U cash til payday.S. economy, down from 51% of those polled in December. More than half of Americans think that a Detroit bankruptcy would have no impact on their personal financial situation.
If a major manufacturer does fall into bankruptcy, government guarantees on their warranties could prove critical to maintaining consumer demand for their inventory of cars. The CNN/Opinion Research pollsters divided their respondent pool in half, asking one group about their willingness to buy a car from a bankrupt auto company. Almost half of those asked - 47% - said they were "not likely at all" to do so, and only 12% said they were "very likely" to buy from a bankrupt company.
But when researchers asked the other half of their survey pool about buying a car from a bankrupt auto maker, they asked how likely the respondent would be to buy if they knew the government would stand behind the warranty on the car. Among those respondents, the "very likely" to buy response rate doubled, to 24%, while the "not likely at all" response declined to 27%.
President Barack Obama said late last month that the federal government would stand behind the warranties on all purchases of GM and Chrysler vehicles going forward. Analysts are waiting to see how much the moves pump up sales.
They pray for recessions and smile a little wider when a company climbs onto its death bed.
Welcome to the world of distressed, or so-called "vulture" investors, an often-ignored corner of the market that has increasingly taken center stage as more businesses slip into bankruptcy or look to shed assets.
There has been no shortage of corporate ruin lately. Lehman Brothers sent a shockwave across the financial system when it collapsed in mid-September. Outside of the banking sector, electronics retailer Circuit City and media giant Tribune Co followed suit months later when they both filed for bankruptcy late last year.
Corporate bankruptcies climbed to their highest level in a decade last year: more than 43,000 American companies filed for bankruptcy protection, according to the American Bankruptcy Institute.
And now there is the very real possibility that the government could force struggling automakers General Motors (GM, Fortune 500) and Chrysler LLC down that same path. Video-rental chain Blockbuster (BBI, Fortune 500) has also been cited as a company that could potentially go bankrupt this year.
Smelling blood in the water, hedge funds, private equity firms and investment banks are quickly marshalling their resources.
Take Goldman Sachs (GS, Fortune 500), for example. The Wall Street bank is reportedly looking to raise several billion dollars for a fund aimed at investing in debt of troubled companies, the Financial Times reported last month.
Firms that have made a name for themselves as vulture investors are doubling down as well. Harbinger Capital, one of the country’s largest hedge funds, is launching a new fund aimed at scooping up distressed loans.
Thinking that the proverbial shoe would drop sooner than it did, many distressed opportunity investors began preparing for a wave of bankruptcies as early as 2007. But that left too many investors chasing too few opportunities, notes Edith Hotchkiss, a professor of finance at Boston College’s Carroll School of Management.
By the end of that year, distressed and restructuring-focused hedge funds boasted nearly $107 billion in assets under management, nearly double what it was just a year earlier, according to industry tracker Hedge Fund Research.
"We had been anticipating this for quite a while, but defaults were not materializing," said Hotchkiss, who has written extensively on corporate restructuring and bankruptcy. "Clearly that problem has gone away."
Easier said than done
Last month, bankruptcy-related acquisitions worldwide surged to the highest level in nearly five years as 34 companies were acquired, according to Thomson Reuters. But that number could climb as corporate earnings remain under pressure free 3-in-1 credit report.
Other investors seem willing to try just about anything to profit from the growing number of distressed companies. Private equity giant Blackstone Group (BX), for example, is reportedly considering launching a $3 billion fund that would provide financing to companies on the brink of bankruptcy. Calls to the company regarding the fund were not immediately returned.
Nevertheless, few are straying from the tried-and-true strategy of buying the debt of a beleaguered firm. In most cases, investors are hoping that they can either turn around and sell the bonds for a tidy profit, or acquire an ownership stake in the company should it successfully emerge from bankruptcy.
Unlike shareholders, which are wiped out in the event of a bankruptcy, debt holders tend to hold onto to at least a portion, if not all, of their investment.
But even as vulture investors start to take flight once again, these investors still face numerous challenges, including a dearth of available financing. Lenders have largely been unwilling to commit funding for leveraged investments, according to experts.
At the same time, banks and other finance companies worry about handing money over to investors interested in buying firms that generate little cash currently.
One private equity executive, whose firm focuses on mid-sized companies, noted that financing has not been a significant issue for his firm as they tend to purchase companies that are "asset rich."
"The lenders who finance our niche of the business have never left the market," he said, speaking only on background given his firm’s strict policy about not speaking to the media.
But the issue of pricing has also short-circuited many distressed deals, said Emanuel Cherney, partner and vice chair of law firm’s Kaye Scholer’s corporate and finance practice.
"There is a sort of disconnect between what people are willing to pay and what people think they should get on the sale of an asset," he said. "That has driven a big decline in deal activity."
Not to mention the issue of performance. Distressed and restructuring-focused hedge funds are one of the few groups within the hedge fund industry that are down so far this year. Last year, they also ranked as one of the worst performers, finishing 2008 25% lower, according to Hedge Fund Research.
Still, it may be hard to keep vulture investors from sifting through all the carcasses that continue to dot the corporate landscape.
Ireland’s Finance Minister Brian Lenihan said the country doesn’t need any bailout from the European Union and that he will continue to cut spending to control a ballooning deficit.
“We don’t need any bailout here,” Lenihan said in a interview with Bloomberg Television from Dublin today. “There are good elements” in this economy, “but we’ve had a crisis in the public finances.”
Ireland’s budget deficit is set to soar to 10.8 percent of gross domestic product this year, more than three times the European Union limit, even after the government announced a plan to cut spending and increase taxes. The economy will shrink by 8 percent in 2009 and tax receipts may drop 16 percent, according to finance ministry forecasts.
“We had to introduce some emergency taxation measures to shore up our revenue base,” Lenihan said. “But where the real heavy lifting has to take place is on expenditure. We’ll keep doing that.”
The government also said it will buy as much as 90 billion euros ($119 billion) of real-estate loans from the country’s biggest lenders in an effort to salvage the banking system.
The government will pay an “economic price for these assets which ensures that both the developers and the banks take a significant loss where they were originally purchased at very inflated prices,” Prime Minister Brian Cowen told parliament in Dublin today faxless payday loan guaranteed.
Debt Rises
Assuming the toxic loans will result in a “very significant increase in gross national debt,” Lenihan said in his emergency budget yesterday. The increase will be offset by the sale of some assets transferred to the government.
The difference in yield, or spread, between Irish and German 10-year notes widened to 215 basis points today from 204 yesterday. The spread widened from 40 basis points a year ago as investors demanded higher premiums to lend to smaller European economies amid the global financial turmoil.
Credit-default swaps on Irish government debt rose to 237 basis points today from 225 yesterday, according to CMA Datavision. They reached a record 393 basis points on Feb. 17.
“The bond markets are paying more attention to the bad loan rescue package,” said Padhraic Garvey, head of investment- grade debt strategy at ING Group in Amsterdam. The loans are the “worst stuff” on the banks’ books and “this is effectively going to be taken over by the Irish government.”
Japan’s Prime Minister Taro Aso wants his new economic stimulus to exceed 2 percent of gross domestic product, an indication the package will be his largest since taking office in September.
Aso ordered “spending to exceed 2 percent of GDP,” or 10 trillion yen ($100 billion), Finance Minister Kaoru Yosano told reporters in Tokyo today after meeting with the premier. The government aims to compile an outline of the measures by April 10, Yosano said.
The government is trying to revive an economy that’s heading for its worst recession since 1945 as a collapse in exports forces companies to fire workers and cut production. Group of 20 leaders last week pledged to spur growth amid signs that the global economy is beginning to recover from its worst financial crisis since the Great Depression.
“We’re seeing some bright signs but they’re not enough to bring forward the timing of a recovery,” Fujio Mitarai, chairman of the Japan Business Federation, said in Tokyo today. “We applaud efforts to beef up stimulus measures.”
While the Nikkei 225 Stock Average’s 17 percent advance since February and a weaker yen have provided some relief, data last week showed business sentiment plunged to a record low and the unemployment rate rose to a three-year high.
Yosano said the spending will focus on the job market, providing credit to companies, energy-efficient technology and welfare health insurance plans. Aso has unveiled two packages totaling 10 trillion yen.
Limited Room
Japan has limited room to spend more to revive growth, with its public debt burden likely to surge to 197.3 percent of GDP next year, the Organization for Economic Cooperation and Development said last week. The world’s second-largest economy will shrink 6.6 percent in 2009, the most since 1945 and steeper than declines of 4.1 percent in the euro area and 4 percent in the U.S., the OECD forecasts.
The International Monetary Fund recommends that stimulus spending be equivalent to at least 2 percent of a nation’s economy.
Vice Finance Minister Kazuyuki Sugimoto, the ministry’s top bureaucrat, said the funding for the measures will be decided after the package is announced. He said the government hasn’t decided whether the spending will be for this year or spread over several years.
The Finance Ministry today said loans from the state-owned Development Bank of Japan and Shoko Chukin Bank Ltd. to medium- to large-sized companies had reached about 1.3 trillion yen since December, according to a Kyodo News report.
The European Central Bank is facing a day of reckoning in its response to Europe’s worst recession since World War II.
After months of delay and internal debate, President Jean- Claude Trichet said yesterday the ECB will announce its decision on new policy tools next month as interest rates edge toward zero. The danger is that the economy will slip further into recession the longer the bank delays.
“By again buying time, the ECB risks falling further behind the curve,” said Carsten Brzeski, an economist at ING Groep in Brussels. “You cannot buy time forever.”
The debate on the Governing Council pivots on whether the ECB should follow the Federal Reserve and the Bank of England in buying debt securities to rescue the economy. Germany’s Axel Weber argues that the ECB must avoid cutting rates to zero and can’t take too much risk onto its balance sheet. Vice President Lucas Papademos counters that such a move could free up credit markets.
The result may be a compromise that’s already taking shape. The ECB yesterday cut its benchmark rate by less than economists had forecast, reducing it by a quarter point to 1.25 percent, and Trichet said the deposit rate has reached a floor at 0.25 percent. At the same time, he indicated the ECB may still reduce the benchmark again and said it’s looking at “optimizing what could be done and should be done to enhance credit support.”
‘Uneasy Compromise’
“The council has still not yet made up its mind on what new non-standard measures it would take,” said Julian Callow, chief European economist at Barclays Capital in London. James Nixon, an economist at Societe Generale SA and a former ECB forecaster, said the announcements had the hallmark of an “uneasy compromise between differing views.”
Trichet reiterated most of his comments after meeting euro region finance ministers in Prague today. The euro fell 0.2 percent against the dollar, slipping to $1.3433, after jumping 1.6 percent yesterday.
As the ECB ponders its next move, other central banks and governments are ramping up their response to the global recession. Leaders from the Group of 20 nations yesterday pledged more than $1 trillion in emergency aid to cushion the economic fallout low cost car insurance. Policy makers in the U.S., the U.K. and Japan have already cut rates to close to zero.
Europe’s economy is also deteriorating and may shrink as much as 4.1 percent this year, according to the Organization for Economic Cooperation and Development. Unemployment jumped to a three-year high of 8.5 percent in February.
Intentions
Possible options for the ECB include buying commercial paper and corporate debt, widening the pool of collateral accepted in market operations and offering banks loans over a longer term, said Elga Bartsch, an economist at Morgan Stanley in London.
Purchases of government debt are less likely, she said. The ECB is hemmed in by European Union rules that forbid it from buying bonds directly from governments, and any decision to buy such debt in the open market may spark political disputes.
Some economists defended Trichet’s refusal to announce non- standard measures yesterday. Stephane Deo of UBS AG said “technical issues are not to be underestimated” as the ECB grapples with a founding treaty that deprives it of a European treasury to indemnify it against losses.
Satisfied
Finance ministers today signaled they were satisfied with yesterday’s rate cut. Portugal’s Fernando Teixeira dos Santos told reporters in Prague the ECB is “making an effort” and Austria’s Josef Proell said the reduction may be “enough.”
The ECB may also surprise economists and investors who have criticized it for not going as far as the Fed and the Bank of England, said Marco Annunziata of UniCredit Group.
While the ECB “disappointed markets” yesterday, “the stage was set for a possible ‘big bang’ next month,” he said. That could include doubling the maturity of bank loans to 12 months and purchases of corporate debt.
“This could have a major market impact, lowering yields significantly and allaying concerns of a very prolonged slump in euro-zone activity,” Annunziata said. “The dire growth outlook clearly calls for further action.”
Bids on Colorado's first road and bridge projects, paid for with money from the federal stimulus package, are being opened Thursday morning at the Colorado Department of Transportation.
The agency announced it was seeking bids on six projects — five paving projects and a bridge project — on March 26, barely a month after President Barack Obama signed the federal stimulus package, formally called the American Recovery and Reinvestment Act, at the Denver Museum of Nature & Science.
Construction company executives have said they expect bidding for CDOT's stimulus package projects to be fierce, as the recession has sapped the amount of work available in the private sector.
Construction companies in Colorado have laid of thousands of employees in a bid to stay in business until the economy recovers.
Colorado is expected to get about $403 million for road and bridge projects across the state, with some of the work handled by CDOT, and other contracts being overseen by local and county governments business card templates free.
The five projects up for bid on Thursday are:
Bids for the sixth project, for bridge repair, will be opened later in April.
Check back with DenverBusinessJournal.com for more on this developing story.
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