Growing Shareholder Value? Yeah, not so much.
I came across this presentation, by MSFT CFO Chris Liddell, while doing some unrelated research. Here's the transcript and webcast. Given the subject matter, I'm not sure why I missed it at the time (directly or via the media). Nevertheless, it's worth a read/review.
Liddell starts out on a scary note:
I also like to think about that I've helped bring the investor perspective into the company, and talk about perspectives like shareholder value.
You mean that up until a couple of years ago, it didn't exist? That won't come as a complete surprise to many holders since '00, but it's yet another data point supporting how disconnected MSFT's leadership team is from their actual core mandate of running the company to increase shareholder (i.e. owner) value. Luckily, Liddell gets back on track and moves to the heart of the matter:
I talk to people about how we can drive revenue growth, both in the short and the long term, how we can translate that revenue growth into operating income growth, so what's our margin structure and what are the investments we're making in order to drive income growth; how we drive earnings per share growth, so how do we take our income growth and drive it to the bottom line, and the number that you would be most interested; and then lastly, what can we do from a cash flow point of view and in terms of managing some of the other levers that we have to impact earnings per share growth over the long term to drive shareholder value.
Unfortunately, he goes on to largely ignore answering those critical bottom line issues adequately.
The early part of the presentation is self-congratulation for the job done on growing the "core" businesses these past years. That's deserved imo, but mostly because of the failure to get Vista out (which makes the growth achieved with mostly the same ol', same ol', more impressive). There's also some reasonable detail on how MSFT hopes to grow these businesses longer term. Then comes mostly fluff on how they plan to grow their emerging businesses in Entertainment and Online. For example, you gotta love the detailed strategic thinking captured in this slide:
Somehow, I don't think this was crafted by a Wharton MBA. I also doubt that it instills fear in competitors like GOOG/YHOO or, more importantly, convinces investors that MSFT has a well thought out, winning, strategy here. Of course, simple though the plan may be, that Online and Entertainment business goodness (?) requires lots of investment, which comes at a steep price:
However, Chris et al think "a combination of all of those factors are the ones that we believe in the future will drive a revenue base in the online area". Ah, at least there might eventually be a "revenue base". Sadly, there's no mention of profits - but I'm sure that must be an oversight. Net net, how very reassuring. NOT!
Inexplicably, Chris wants to remind you that, had they not made these investments, overall margins would have been better:
Um, is that meant to inspire investor confidence in the leadership team and their investment choices? After all, why is it that GOOG, Apple, Nintendo, [insert pretty much any other top-tier tech company here], can consistently invest far less, and yet monetize it via significant revenue and profit increases far faster?
The slide-deck "pièce de résistance" though, is this one, meant to capture the glowing history of issuances vs repurchases, and setting the stage for the subsequent "money returned to shareholders" finale:
That's a beautiful thing, right? After all, buybacks are trending higher while issuances are trending lower. Er...not quite so fast. While the trend is decidedly positive, do the rolling math - which MSFT conveniently avoided: Total issuances: 1,815M, total repurchases 1,972M. So, the staggering amount of shareholder cash spent on buybacks over this 7 year period ($43B since '02 alone) has reduced shares outstanding by a whopping 157M shares.
In other words, the vast majority of buybacks to date didn't benefit shareholders directly. Instead, they merely avoided the additional dilution that would have occurred had these massive payments to insiders been allowed to further increase shares outstanding. Meanwhile, the stock grossly underperformed all major indexes, thereby negating the excuse that that payout was justified by results on behalf of shareholders. It is an absolute embarassment - not to mention insult to shareholder intelligence - that MSFT continues to grossly misrepresent the true nature, impact, and principal beneficiary of the buybacks done to date using what was/is, after all, our cash to begin with.
The presentation ends with a review of historical dividends paid, while omitting the fact that MSFT's dividend badly lags even the S&P average, far less the DOW 30 (of which MSFT is a member). Finally, nowhere in the ENTIRE presentation is a chart showing the performance of MSFT's stock over this period (for reasons all too obvious to shareholders). After all, why would a discussion entitled "Growing Shareholder Value" want to focus on that?
Liddell appears to be sincere in his focus on shareholders, and this isn't aimed at him directly. However, MSFT's current leadership team needs to stop playing hide-the-pea shell games with investors and misrepresenting money "returned" to them that in fact went to insiders (with a disproportinately large share of that going to senior management). Instead, they need to be honest with shareholders, and start delivering meaningful bottom line earnings acceleration (not just talking about or promising it) that will drive the stock and create realizable shareholder value (i.e. share price appreciation). You know, like they've been paying themselves as if they were doing, while the lesser-paid teams at Apple, Google, etc., have actually been doing it?