Investing Journal: Microsoft

Jump In: Working for Xbox

Tue, 01 Apr 2008 05:21:36 GMT

After working in MSN/Windows Live for nearly 5 years, and Windows Live ID for over 2 years, I've decided to transition to the Xbox console team.

I've worked with quite a breadth of technologies at Microsoft: On the billing and subscription platform, I worked heavily with SQL databases, and with C# and xml tools. Then on Windows Live ID, I was able to learn a lot about how to build a performant, scaleable service, and worked on the sign-in page (HTML, JS, CSS, C++), admin services (SOAP, C++), and Delegated Authentication (C#, ASP.NET). I realized that my passion was around making sure users have great experiences.

One of my favorite books, Good to Great, talks about how when building a business (or following a career), you need to focus on the intersection of 3 circles: What you're passionate about, what you can be the best in the world at, and what you can make a lot of money doing. As I looked at these three circles, and what they meant for Microsoft, and what they meant for me, I realized that Xbox was the perfect fit.

Today was my first day on the Xbox console team, where I'll be working on the UI and User Experience of the guide and dashboard. I'm really excited to work on a product I love and that is best in class, and to be able to help make user experiences on the console even better.

Sharing your Windows Live contacts and Facebook

Tue, 25 Mar 2008 17:47:00 GMT

The last project I worked on here at Windows Live ID was the Delegated Authentication service, which allows you to share your Address Book with any other site that's interested in it. Today we announced partnerships with Facebook, Bebo and others to mutually share contact information between services. In Facebook, you can now go to the Friend Finder, and type in your hotmail address, and instead of having to give Facebook your password (bad), they redirect you to the Windows Live sign-in page, where you type your password. We then share a token with Facebook which they use to get your contacts from a real Contacts API.

Also related, is the big news that you can now export your contacts out of Facebook, using our new Invite2Messenger page. Previously Facebook did everything in their power to limit your ability to export your friend list. So this is a pretty big first step in the right direction of being able to be in control of your online identity across multiple sites.

Unfortunately, several sites such as Tech Crunch and others are interpreting the news incorrectly, suggesting that Microsoft is following Google in this arena. It's pretty frustrating that despite being a leader in this area, we're passed off as followers. But these authors all use gmail instead of hotmail, so I guess they must pay less attention to Microsoft's online innovations.

Fixing Microsoft

Wed, 28 Mar 2007 18:23:09 GMT

I regularly read MSFTextrememakeover, and joke about the author's "enthusiastic negativity" about the company, which led me to question why he was still a shareholder despite frequently quoting so many big problems. I also challenged him to make a statement about what he would change at the company, to which he responded quite thoroughly in a recent post.

http://msftextrememakeover.blogspot.com/2007/03/for-want-of-shoe-or-time-for-new-rider.html

It's too long to summarize, but if you're interested in a laundry-list of ways Microsoft could improve, check it out. I certainly can't say I agree with everything, and a lot of the solutions look pretty idealistic (changing the culture from "good enough" to "great"), but it's interesting to think about.

Windows Live ID Client SDK alpha release

Fri, 02 Feb 2007 06:43:58 GMT

Today we released the alpha of the SDK for using Windows Live ID authentication in your client (non-web) application. Check it out:

https://connect.microsoft.com/site/sitehome.aspx?SiteID=347

I'm actually writing this blog post from the sample app in the SDK. I'm glad we're finally opening up the platform a bit more.

OK, so I had to update the formatting via the web a bit... so you won't be blown away by the sample, but hey, its a start.

Windows Live Change User

Mon, 08 Jan 2007 00:15:10 GMT

I was commenting on a friend's blog, and notice that my wife was signed into Windows Live. So I clicked the Sign out link above, clicked Change User, and clicked my user tile on the sign-in page, and was brought back to where I was, logged in as myself. I have to say that that's awesome. Yes I've done it before, but it really struck me, that no where else on the internet, can you click 3 times, and change who you're signed in as. I have to say it's the best login experience on the internet, but I may be biased because I work on it. If you have any suggestions for identity and sign-in related improvements, I'd love to hear about them.

I really like what we're doing here in Windows Live, and I wish we could get where we're going faster, but I really like the integration between services.

Microsoft Stock directions

Tue, 14 Nov 2006 08:44:49 GMT

Including dividends, MSFT stock is the highest it has been since early 2002, with Monday's close at $29.35. It's now pushing the psychologically important $30 mark. The only time since 2002 that it has managed to go above $30 is right before the special $3 dividend. With 4 independent historical peaks at the $30 mark, it's a strong resistance point for the stock, not to mention the psychology of the nice round number. When I talk with others at Microsoft about the stock, they all seem to wait for higher prices before they sell shares they own. Most people seem to be waiting for $30 before they'll sell, which is why I think the stock will not cross $30, or if the market drives it over $30, that it will have trouble maintaining that level once the market pulls back. Who would buy MSFT for more than $30, and how could there be enough buyers to compete with all the internal selling?

As I've written before, I think the 15% MSFT drop in April was justified -- mostly because the stock was tracking its highs when it happened (adjusting for the dividend). With the rising market, my price targets for MSFT are slightly increasing, but I still don't value the stock much over $26. Over the past 5 months, the stock has gone up 37%, versus 13% for the S&P 500, which actually makes MSFT slightly ahead of the S&P 500 YTD. This is the first year in awhile that MSFT has actually outperformed the index. Since expected future earnings primarily drive stock prices, with Microsoft's earnings being so stable, there's absolutely no reason for the stock price to change 37% in less than half a year.

I looked through the last several years of earnings releases to see if I could determine why the stock has stayed so low for the last 5 years. These are my interesting findings:

At MSFT's all-time-high price of near $60 in Dec 1999, MSFT's P/E ratio was about 75.
In 2002, MSFT's price settled at about $25, which was a P/E ratio of 50. Note that it never really escaped $25, since it was at a dividend-adjusted $25 earlier this year. The reason the price fell by more than half, and the P/E didn't, despite growing Operating Income was because 1) Microsoft started expensing earnings, which accounted for about a 25% reduction in net income, and 2) Investment income fell from 10-20% of Operating Income, to a small negative amount.
In April 2002, Microsoft started issuing forward year guidance, which indicates how much money the company expects to make from the next July through the following June. In the last 4 years, Microsoft has never actually succeeded in meeting the top level of its own earnings guidance, in some years missing significantly. The following are the deficits in Operating Income from FY03 - FY06: 3%, 28%, 12%, 15%. Yes the FY04 estimates were 28% higher than actuals, thanks to lawsuit and antitrust settlements.
MSFT's current P/E ratio is 24. Earnings have doubled in the last 4 years, and the P/E ratio has halved.

Clearly, MSFT hasn't met its own growth expectations over the last 5 years, and its declining P/E ratio indicates that the expected future growth is quite low. Using Moneychimp.com's share price calculator, using 9% growth for 10 years, and 4% growth thereafter, the price comes to $27. Changing the long term growth to 5% gives a $30 stock price. It's the long-term prospects that really drive a stock price, but of course they are impossible to predict. This is why I rely on the recent past when I value MSFT, instead of trying to predict the future. This is why I think the stock will fall 10% from here.

It takes $100 million in net income to produce $.01 per share of earnings. I question if the Zune, Xbox, and Live initiatives will produce any meaningful earnings growth in the near term. I don't want to be too negative about the company I work for, but Vista doesn't impress me too much, and I don't think sales will beat expectations, and while Outlook 2007 is awesome, how many users will upgrade? It's time to be realistic. The euphoria around the stock buyback and Vista and Office shipping have given the stock an excess of momentum, while the future prospects haven't really changed.

I also want to make myself clear, that I don't think the stock is doomed. I expect that if it were fair valued at ~$27, that it would grow by about 10% a year for a long time. That's essentially what stocks do in an efficient market. Thus by the end of next year I do expect it to be at about $30, but with adjustments for earnings surprises.

MSFT FY07 Q1 earnings

Thu, 26 Oct 2006 20:42:23 GMT

MSFT released Q1 earnings just now, and the market yawned.

Actually, it's quite difficult to decipher this earnings report because it's going to be a really weird 2^nd quarter, with Xbox ramping up sales, Zune being released, and Vista and Office releasing next quarter, there's going to be a lot of spending happening. Also with MSFT buying back billions of shares, it's hard to use EPS as a reliable metric. The best metric is to track Operating Income and Revenue for FY07.

Projected FY07 earnings	As appearing in FY06 release	As appearing in today's FY07 Q1 release
Revenue	$49.7B - $50.7B	$50.0B - $50.9B
Operating Income	$18.9B - $19.4B	$19.1B - $19.5B
EPS	$1.43 - $1.47	$1.43 - $1.46

I'm happy to see the numbers growing slightly, but not significantly over the last 2 quarters.

You'll notice I haven't even mentioned how this last quarter was. I don't even find it relevant in pricing MSFT unless there was something significantly unexpected. With earnings actually higher than expected ($.35 vs $.31), and forecasts slightly increased, my impression of Microsoft was improved by today's release, but my perspective of the stock is that I still don't think there's quite enough growth coming to justify the price run-up over the past few months, and I still think it's a good price to sell at. After all, there's a lot of resistance at this price, but little support if it drops.

Google buys YouTube, a Microsoft perspective

Wed, 11 Oct 2006 19:47:55 GMT

So Google actually bought YouTube for $1.6 billion in stock. Buying in stock means they're printing that many new shares, and handing them over directly to the YouTube owners. Every owner of Google now gets a little less ownership of Google, but they gain ownership of YouTube. There seem to be 3 interesting angles to this story, but I'd like to focus on the last:

1. What's a fair price for YouTube?

2. What about the copyright issues?

3. Why didn't Microsoft make the purchase?

Price: Regarding the price, it's pretty clear that Google isn't buying the technology--it's buying the users, which apparently works out to about $33 per user. MySpace was bought at a price of $5-6 per "friend" according to ZDNet (actually using the number of friends today, not at purchase time). The article also states that MySpace gets about $2 per friend in revenues. I can't really comment to much, because no one really knows how users will react to advertising, or paid content, or no free copyrighted content. It seems like a high price.

Copyright: It's nice of Google to take the initiative and invite copyright battles, but not for its shareholders. I can't imagine them being successful in allowing copyrighted content on their site, which would really diminish the value of YouTube for a lot of users.

Microsoft: Well one thing's for sure: The Google, YouTube purchase was not a good thing for either Microsoft or Yahoo. YouTube will become a much stronger video player being backed by Google, and will likely grow users at an even faster pace now. At least until they're forced to stop providing copyrighted materials for free, but that was bound to happen to the industry anyway. Any decent software company around could have easily copied or even improved upon the technology in place at YouTube, but as I already mentioned above, YouTube was bought for its users, not its technology. Would this purchase have made as much sense for Microsoft as it made for Google? No way. Microsoft made a very smart move by not out-bidding Google for YouTube. Microsoft already has a community built around its online offerings. It has hundreds of millions of people visiting every month regularly to use Mail, Messenger, and Spaces. Once Soapbox is established, and integrated with these 3 properties, the user base will come. Why leave the Microsoft network, if the same technology is in place and integrated with the other online tools you already use? Remember how quickly Spaces exploded? From a Microsoft fact sheet a year ago:

April 28, 2005 - MSN has 200 million active Hotmail accounts, over 165 million active MSN Messenger accounts and over 400 million unique monthly users visiting the MSN portal. MSN has 3 million narrowband Internet access subscribers and approximately 9.1 million subscribers worldwide.

Updated data shows that 100 million people visit Spaces every month. Microsoft doesn't need to buy users. It needs to provide seemless integration with new technologies in existing entrenched properties. MSN Soapbox should integrate very well with Messenger and Spaces and provide Microsoft the same technology, with the community already in place. I will admit that a lot of the Microsoft offerings are a little rough around the edges (I'm looking at you Spaces), but despite that the user count is remaining very high on these services. The integration is just too compelling to leave. It's the only reason I'm blogging from Spaces.

Updates: Just found the recent Business Week interview with Balmer that touches on YouTube pricing and more.

Market Watch has a good article going over the price point of the deal. If they can get even $.01 per page view, and not knowing expenses (legal or operating), they calculate that it could be a really good deal.

Dare's meeting with Bill Gates

Tue, 10 Oct 2006 19:15:43 GMT

A Microsoft employee blogger, Dare, wrote about a 1-1 with Bill Gates last week. It's an interesting read about Africa, with some insights into Bill's life.

MSFT's buyback bubble (and do buybacks raise share prices?)

Sat, 19 Aug 2006 23:15:11 GMT

On 7/19, Microsoft announced a $20 billion tender offer, which I covered on my blog last month, and which closed on Thursday with only $3.8 billion of shares being bought. Friday, Microsoft announced that it would add the remaining $16 billion to its long term buyback plan, which already had $20 billion earmarked for it. Notice how the stock has performed relative to the Nasdaq over this period of time. The two buybacks have caused Microsoft to outperform the Nasdaq by 7%, and that's fairly significant seeing as how Microsoft itself is the biggest stock in the Nasdaq. The market sure likes to see the buybacks. Another really weird thing about Microsoft going up 4.4% on Friday, is that now Microsoft is spending that $16 billion dollars to buy back its stock at a higher price than it had originally anticipated in its tender offer. Why the market celebrates paying a higher price for stock is beyond me.

Do buybacks raise share prices? On a mailing list at work for the last two days, we've been debating the fundamental worth of buying back stock. It's a complicated thing, but it's quite clear that the shares should be fundamentally worth the same price before and after a buyback. In a buyback, the company buys shares at the market price, and then destroys those shares, an event which takes away value from shares (less cash per share) and adds it back (a single share now owns more of the company) in equal amounts. There was some discussion about leverage increasing the value of the company, but my counter-argument was that any increase in return is offset by an increase in risk (or discount rate), which offset each other.

In the short term, there will be an aggressive buyer in the market (MSFT), and as more shares get bought, fewer shares are in the market, so the price may rise in the short term when a buyback is announced. And as witnessed the price usually does rise (and it should with the supply and demand considerations above), but the company is not fundamentally worth the higher price, so demand will have to fall and the price will stabilize back down to the price before the announcement.

Anyway, so, I'm thinking Microsoft was relatively fairly priced relative to the market on 7/19, and now the recent increase has no merit. With people saying Vista needs another beta, and Microsoft dumping cash into Zune and Xbox, and Windows Live not making a profit, I still don't see Microsoft fulfilling it's potential, and think it's overvalued. If I had any shares I would sell. I think they'll underperform the market.

Windows Live Writer

Tue, 15 Aug 2006 04:36:53 GMT

I'm writing this blog post from a new program called Windows Live Writer. I'm surprised that I hadn't even heard of it before, but anyway, it was released today, and so far has been simple to set up and create the post. It's supposedly excellent at uploading images, which will be great for the stock charts I've wanted to upload, but haven't because of the formatting. The program has also been receiving good reviews because it allows developers to create plugins. I might look into it to see if a stock chart plugin would be useful to developers. I'd been excited to have Office 2007 ship so I could blog from Word 2007, but this looks like it will be my blog authoring tool of choice.

Microsoft Financial Analyst Day

Fri, 04 Aug 2006 03:53:40 GMT

For the past week I've been watching a talk or two per night from the recent Financial Analyst day here at Microsoft. I took some brief notes of things I thought were meaningful, but I'll just post them in list form.

Photosynth was demoed to the world for probably the first time. It's an absolutely amazing way of looking at a collection of photos in 3d space. Check out the video demos on their blog.
They also demoed a technology where you could hook up a keyboard and mouse to your phone, and then hook your phone to a TV (or projector), and have a pseudo-PC. You can do anything you can do on Windows Mobile 5 (internet, Office, music, video), which covers most things emerging markets would need a computer for.
They also discussed some interesting examples of how technology can make health care and education more efficient and higher quality.
Vista was mentioned, and the company said it was on track to ship as planned in January, but left the door open for future delays, which in my opinion, is a much better thing than committing to a date, and releasing a buggy product. One financial analyst commented that he built in a Vista delay into his target price for Microsoft. With only 3-4 months until Vista is done, I don't see how it could delay more than a month or two more, in which case, I can't see it impacting the stock much. If there is a delay, and the stock drops, I'll buy.
Future streams of income: Windows Genuine Advantage will be required for IE7, Windows Defender, Windows Media Player 11, and the Aero graphics theme in Vista. Balmer says that thanks to this, our Windows revenue should grow faster than PC growth, as more people go legal with their copies of Windows.
There was a lot of talk about community: 320 million Live IDs have signed in in the last 30 days. The announced Zune music player will be built around 3 pillars: community, discovery, integration. Live Anywhere: it was suggested that a Vista dashboard and platform for cross-platform integration and friends would be launched when Windows Launches.
Ray Ozzie and Steve Balmer, and everyone for that matter, talked about the transformation to services. Ray Ozzie said:
"A fundamental transformational shift toward services is a necessary and appropriate course of action for all technology companies."
Microsoft spends $1 billion a year on buying out companies, and $6-7 billion on R&D.

Nothing in the conference was terribly exciting that I'd recommend it to anyone, but it was better than watching 8 hours of summer prime time TV. I think Microsoft's stock will beat the market over the next several years, but I don't see it significantly beating the market. I think that starting in the next few fiscal years we'll see much more contribution from online services, home and entertainment, and mobile. I think, however, that there's so much investment that needs to happen in the short term to compete against Google/Yahoo, Playstation, and iPod, that the stock won't go anywhere for another year.

MSFT FY06 earnings and $20 billion buyback

Thu, 27 Jul 2006 06:04:57 GMT

Microsoft released FY 2006 earnings last week, and I finally got around to the analyzing the numbers.

Microsoft will spend up to $20 billion dollars buying back about 8% of the company's shares. To shareholders, this means that they get an 8.7% bigger share of all of Microsoft's future profits, and current (after the buyback) assets. The cost to the shareholder, is that the company spends cash worth 8% of the company's value to buy back the shares. To put it as brief as possible, you now own ~8% more of a company that is worth ~8% less. If you think the company is undervalued (which you do if you own the stock), owning more of it is a good thing. For reference, if this were a dividend instead of a buyback, the short story would be: you now own the same amount of a company that is worth ~8% less, and you own that 8% (-15% tax) in cash.

Since fundamentally (or mathematically) dividends and buybacks don't change the value of the shares of the company at all, I'm always surprised at the market's generally positive reaction to these types of news events. Dividends and buybacks don't raise the value of companies, they simply offer methods to dispose of cash. MSFT's EPS and P/E will go up by 8%, but the book value will drop by about $2 per share. The only reason I can think of for the price to go up, is because the market is based on supply and demand, (supply of shares is fixed, and demand is based on judgments of worth of the company). Microsoft wants to buy a bunch of shares in a short amount of time, creating an artificial demand spike, that will drive the price up in the short term, but have no lasting effects in the short term.

Another impact, as I mentioned above, is that buybacks artificially inflate EPS numbers. I was excited to see EPS estimates for FY07 increase about 8% in the news release, until I realized that that was simply due to a reduced number of shares, and that the actual income estimates were slightly lower than previously expected. Investors will not likely all take into account the buybacks (decrease in assets, really) as they look at Microsoft's improved EPS and P/E ratios, which may also put medium-term upward pressure on the stock.

I was surprised to see MSN finish the year in the red. I can't believe that the online service that is the default homepage for millions of computer cannot even make a profit. (This isn't quite fair, because msn.com sure is profitable, it's other services that operate at a loss). The level of advertising revenue is ridiculously lower than Yahoo and Google. Until Windows Live can convince users that its search engine is as good as Google's, the revenue is likely to stay low. But as soon as the search engine is good enough, the existing Windows Live users will stop switching to Google for their searches, and stay within the network, the revenue ought to start pouring in.

Microsoft adCenter shipped / Unique User Count.

Thu, 04 May 2006 19:16:43 GMT

While reading Microsoft's press release stating that Microsoft adCenter is launching, I noticed that it reported how many users MSN has, so I thought I'd do a little digging:

MSN: "MSN attracts more than 465 million unique users worldwide per month."
Yahoo: "As of October 2005, more than 411 million unique users worldwide visit Yahoo! each month."
Google: "Global unique users per month: 380 million (Nielsen/NetRatings 8/05)"

Now the revenue and profis:

MSN: $2.2 billion revenue
MSN: $405 million profits (Jun 05)
Yahoo: $5.2 billion revenue
Yahoo: $2.7 billion profits (Dec 05)
Google: $6.1 billion revenue
Google: $2.1 billion profits (Dec 05)

I think these numbers are a bit surprising and underscore my points in my previous post about MSN is dripping with potential. AdCenter finally shipped. Maybe Microsoft will finally realize some of that untapped potential. Also note that the unique users don't count microsoft.com, xbox.com and other visitors that Microsoft gets. IPTV could also be considered visitors within the grasp of adCenter. Sounds pretty powerful to me.

Talking about Passport

Mon, 06 Feb 2006 19:16:46 GMT

Here's a blog entry (first in a series it appears) from a Program Manager in my group, Passport. In this topic he gives an overview of Passport, and why sometimes you have to sign in over and over. In future posts he will apparently talk about ways we're fixing that. Note: the problems aren't related to the passport service, they're simply because of the way different sites are choosing to implement passport. Read on for more details.

Quote

Why does Passport sign-in suck?