I recently did something that I’m not entirely proud of: I bought a new lap top. It’s beautiful, it’s thin, and (dare I say it) it might be a bit quicker than my Macbook Air. I am now “that guy” that trawls through airports with two lap tops – one work, one personal.
And when I made the work lap top decision (and here’s the part that I’m not proud of), I bought it with Windows 8 pre-installed. It looks very pretty, with panes of purple and violet. But I have no idea how it works. And, more importantly, I have no idea how to turn it off. Also – it keeps moving between screens and programs when I’m mid-sentence on an email*.
My other point of reference is how regularly Microsoft Excel thanks me for my patience as it crashes and deletes the last 30 minutes worth of concentrated spreadsheet work. But Microsoft Excel doesn’t seem to discriminate between Windows and iOS on that front – so the point is a bit irrelevant.
Anyway – the reason I bring it up is because Microsoft made an earnings announcement yesterday. And there’s always a bit of a flurry around earnings announcements.
What is an Earnings Announcement and Why People Pay Attention
An earnings announcement is usually made quarterly, being the company’s performance for the last quarter. There was a time when the release of the Annual Report was big news. But in today’s world of fast moving shares (see Observation Number 7: Short Term Gratification killed the West), the quarterly earnings announcements get much more attention.
- The company’s accountants prepare some figures.
- These get sent to the Investor Relations team, who prepare a well-illustrated report with facts, figures, and a glowing performance review from the CEO**.
- The investor relations team also prepares a much more generic report to send to to the Securities & Exchange Commission (in the US). This report is commonly referred to as a “filing”. So if you ever hear people talk about a company’s 10-K filing, what they mean is the annual report of the company. If you’re interested in the various types, here’s a link to the SEC explanations.
- While this is happening, Bloomberg does a survey of all the analysts that study the company to get their thoughts on what the quarterly earnings will look like.
- The average consensus is then declared to be the “market expectation”.
- And this is important, because despite fairly ambivalent evidence of it working in practice, most people accept the Efficient Market Hypothesis (EMH). And if you accept the EMH, you believe that all known information about the company is already incorporated into the share price.
- The implication here is that the share price will only move in response to an earnings announcement if the market is “surprised”. That is: if the earnings are different to the “market expectation” in point 5 above.
- Hence the media interest around the earnings announcements.
Frankly, I have some issues with EMH (see Observation Number 5: Efficient Market Hypothesis?). But despite the opposition – the point is that most people believe in it, which means that they tend to react to earnings announcements in the same manner as Pavlov’s dog: salivation, and barking. I too have been known to salivate and bark if it’s a company that I’m invested in. Sometimes, when you have a vested interest, you just can’t help yourself.
Let’s Talk About Microsoft
In my mind, I sometimes put Microsoft and Blackberry into the same box: old-school, used to be well-popular, but their operating systems are a bit useless, and they got left behind when other cooler companies made other cooler products.
But they’re definitely not the same thing. Because I will never buy a Blackberry. But despite my desperate attempts to avoid it, I did buy a Windows machine; and I spend more time on Word and Excel than I do on Facebook and Twitter. That is not going to change fast. It would be like “not using technology” or “giving up bacon”.
So it shouldn’t be that surprising (ironically) that their profit figures were good. The highlights:
- there was cost control;
- there were plenty sales of business and server software***;
- there were fairly weak sales of computers loading with Windows 8 (more fool me).
- Despite this, profits per share were 4 cents higher than predicted.
- Which doesn’t sound like much.
- Until you multiply it by the billions of shares in issue.
*Unless I actually want it to move between screens and programs. Naturally.
**General Rules of Thumb: “the more illustrated the report, the badder the news”; and “the CEO report is always glowing”.
***I refer back to my point about Word and Excel. It doesn’t matter what type of lap top/PC you buy, you need Microsoft Office. And in an internet age, it’s just not that easy to use a pirated version. Most people I know have gone legal on the Microsoft software. Just saying.