Microsoft Loses Out On Mulally, But Outlook Still Good


Nomura Global Market Research analysts Rick Sherlund, Kashif Sheikh, Frederick Grieb and Xiaoyan Zhang maintain a Buy rating for Microsoft Corporation (NASDAQ:MSFT) as Ford Motor Company (NYSE:F) CEO Alan Mulally, who was long suspected to be the frontrunner for Microsoft’s CEO seat, has confirmed that he won’t be leaving Ford.

Alan Mulally to stay with Ford

According to a report from the Associated Press after the close on Tuesday, Ford Motor Company (NYSE:F) CEO Alan Mulally, who was long suspected to be the frontrunner for Microsoft Corporation (NASDAQ:MSFT)’s CEO seat after Steve Ballmer’s departure, has now confirmed in an interview that he is not leaving Ford and will remain there at least through 2014. Analysts had earlier written about his strong candidacy, supported by his “nondenial denials”, though they started to lose faith as the process dragged on and the board appeared to be seeking additional technical qualities in a new CEO, which analysts at Nomura spoke about in December.

Analysts had earlier noted that the Board was trying to attract a technical complement to Mr. Mulally, including Paul Maritz, who had no interest in the position. They believe other executives within the tech sector who are highly qualified to be a more technical CEO have declined the position, so they are hopeful that the Board has others who might both redirect the company, but also be shareholder friendly in the process as they have written about previously. No comments, for the record.

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Today’s AP report mentions how Mr. Mullaly would not comment on whether he ever spoke to Microsoft Corporation (NASDAQ:MSFT) about the CEO position, and in a follow-up question with Microsoft, a spokesperson told the AP “Out of respect of the process and the potential candidates, we don’t comment on individual names.”

Microsoft board likely looking for more technical talent in a CEO

Analysts still think the board is looking for an individual who has experience running a large organization and has the ability to execute a turnaround. A Microsoft Corporation (NASDAQ:MSFT) blog post from John Thompson (lead independent director) in mid-December threw cold water on Mr. Mulally, they thought, by referencing Chairman Bill Gates comments at the Shareholder meeting that implied (Nomura’s interpretation) that Mr. Gates was becoming more insistent on a CEO from the Tech sector. This gives further credence to reports of some “dark horse” candidates with more technical experience, whom analysts believe Microsoft’s Board has approached over the past month. Internat candidates Tony Bates and Cloud & Enterprise exec Satya Nadella are good internal candidates, but in analysts’ view more likely to take direction from Microsoft’s Board rather than redirect the Board and take the company in a different direction as they prefer.

Analysts maintain a Buy Rating on Microsoft Corporation (NASDAQ:MSFT) shares in the expectation that the CEO can both set a new direction to fix the business and also enact some more immediate actions to enhance shareholder value such as a 10% cost reduction (saves about $0.50 in EPS), a 10% share repurchase (adds another $0.30 to annual EPS), and better focus the business (possibly adding an additional $0.20 in EPS) as they have articulated previously.

Microsoft’s business

Analysts think PC demand was about as expected in the quarter (simply less bad may be good enough as we saw in the September quarter, with lower prices, better battery life with the introduction of the Intel Haswell microprocessor and more creative form factors all helped notebook demand firm up they believe).

Xbox One probably shipped about 3.2 mn consoles, which they expect was capacity (supply) constrained. This would be below analysts’ earlier estimate of 4.2 m units, but since Microsoft Corporation (NASDAQ:MSFT) loses money on each new Xbox One console at this early stage of the life cycle there is no real earnings impact from this. There are reports that Sony shipped 4.2mn units, which was $100 per console less in price and was released about a week earlier and appeared to have greater supply availability.

Surface and Surface Pro devices

Surface and Surface Pro devices were are in tight supply, more from Microsoft being shy of over producing than demand based. Nomura’s channel contacts have noted there just were very few machines available from Microsoft and supply was not being well managed. Microsoft Corporation (NASDAQ:MSFT) may have done better than a million units which is still ok, but we think demand was better than supply,

Analysts do believe Bing (search) may have had a better than expected and seasonally strong volume quarter, hopefully being on track to make further progress in narrowing the operating losses, which exceeded $1.0bn in fiscal 2013.

Overall, analysts look for earnings to be in the range of Street expectations and good enough as they await the bigger news of who will be the next CEO of the company and whether this will indeed be a strong candidate that can both redirect the business and generate greater shareholder value.

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