THE DAY AHEAD: Agony over Reg FD and Microsoft estimates

Larry Dignan
3 min read

"With Regulation FD, management of Microsoft is disclosing far less data about the monthly tone of business (in practice, resulting in less disclosure rather than more disclosure as intended in theory by Regulation FD), so we have extrapolated from industry trends without implying as much precision in our estimates as we might otherwise be able to offer if management were willing to comment."`

You have to feel for Goldman Sachs analyst Rick Sherlund. Microsoft's (Nasdaq: MSFT) first and favorite Wall Street analyst had to lower his earnings estimates for the December quarter without any spoon-feeding.

Part of the lowered estimates is the obvious slowdown in PC sales. The other part is that Microsoft isn't slipping Sherlund information because of the SEC's Reg Fair Disclosure, which doesn't allow companies to tell analysts the little things like, "Hey, we're comfortable with your estimates."

In a research note, Sherlund said he now expects December quarter revenue to be lower by $125 million, knocking sales to the $6.77 million to $6.8 billion range. The new number reflects an 11 percent rise year-over-year vs. the previous 13 percent target. Revenue for the March and June quarters were cut as well, by $200 million and $150 million, respectively.

In other words, Sherlund didn't exactly chop his estimates (he was already on the high end of Street estimates). But to recognize the importance of Sherlund changing Microsoft's estimates, you've had to listen to a few earnings conference calls and know a little history.

The Microsoft-Goldman Sachs relationship runs deep. Goldman brought Microsoft public in 1986 (you can find the original prospectus here). Sherlund, who has covered Microsoft since the IPO, is usually the first analyst called on to answer questions. He's the first analyst to say, "nice quarter guys," and to say he's chummy with Microsoft management is a massive understatement. Sherlund is part of the Microsoft family.

Sherlund's status with Microsoft allowed him to be dead-on with his financial models. It must be pretty frustrating that Microsoft can't be as open as it used to be. Sherlund now has to face the element of surprise -- he could actually be wrong. Now Sherlund is like the rest of us. Awww.

The Goldman analyst must have been uncomfortable with his call, given that he really didn't change estimates much and the stock fell 7 percent or so in morning trading. So Sherlund got on the horn and held a conference call a few hours after delivering his research note.

During a conference call with clients, Sherlund noted that he was "flying by instruments" because there "was not a lot of visibility" for Microsoft's quarter. "I'm being a bit proactive and hopefully not incorrect," he said.

Sherlund also added a bunch of hedges, but luckily stopped short of completely flogging himself. He told listeners to view his comments "directionally." Translation: Don't take this estimate change too seriously because Microsoft isn't a sinking ship by any stretch.

"These estimates reflect our best guesses of where things are headed directionally," said Sherlund.

It didn't take long for other Microsoft analysts to reiterate that the software giant is a buy. They basically shot down Sherlund's caution, even though the Goldman analyst only really fell in line with his counterparts.

The Reg FD game

Sherlund's call on Microsoft makes for an interesting debate on Reg FD, but he's hardly alone.

Here's the quagmire: Companies can't say much of anything to analysts -- good or bad. That leaves analysts attempting to do their own homework -- which can be dangerous. The Reg FD coupled with the "analysts are sheep" theory leads to round after round of downgrades based on what could be half-cocked hunches.

It's a big guessing game. Yahoo! (Nasdaq: YHOO) is getting hammered with daily downgrades because of online advertising worries. The company is stuck -- it can't tell the downgrade-happy analysts they are wrong and it's probably too early to predict the quarter.

And Yahoo's silence is killing shares. TDAIN

• Goldman Sachs cuts Microsoft earnings
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