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Microsoft Stock Plummets On March-Quarter Miss, Weak Guidance

Microsoft ( MSFT ) stock tanked on Friday, slicing through its 50-day moving average, after the company missed March-quarter targets for sales and earnings and guided June-quarter sales nearly $1 billion below views. Microsoft was down nearly 7%, near 52, in midday trading on the stock market today . It ended the regular session Thursday at 55.78, within spitting distance of its all-time high of 56.85, reached on Dec. 29. IBD’s Take: How healthy is Microsoft’s stock, and how does it compare to rivals? Find out at IBD Stock Checkup Late Thursday , the Redmond, Wash., software leader said it earned 62 cents a share excluding items, flat with the year-earlier period, on sales of $22.08 billion, up 2%, for its fiscal third quarter ended March 31. Analysts polled by Thomson Reuters expected 64 cents EPS and $22.09 billion in sales. Q3 EPS would have been 66 cents without a tax adjustment. For the current quarter, Microsoft expects sales of $22.05 billion, at the midpoint of its guidance. That would be down slightly from $22.18 billion in the year-ago quarter, and it’s almost $1 billion below the $23.04 billion modeled by Wall Street. It did not give an EPS target. Microsoft’s fiscal Q3 results were in line to slightly ahead of estimates after adjusting for a higher-than-expected tax bill, Jefferies analyst John DiFucci said in a research report. But Microsoft’s fiscal Q4 guidance was below consensus in every business segment, he said. The implied EPS for Q4 was almost 10 cents below the consensus estimate of 66 cents a share, he said. DiFucci rates Microsoft stock underperform, with a price target of 40. “Management spoke of macro weakness, a topic we do not expect many companies to blame, other than those that are simply not doing well in the market, or where expectations are overly optimistic,” he said. “Given the high percentage of annuity business, we believe the business momentum is even worse that implied in the revenue shortfall predicted in guidance.” Microsoft faces meaningful risks associated with its continued dependence on the PC business and increased competition in the cloud computing market, DiFucci said. Windows PC sales continue to be weak, a situation that also hurt March-quarter results for chipmaker Intel ( INTC ). Cowen analyst Gregg Moskowitz called Microsoft’s results and guidance “uninspiring.” He reiterated his market perform rating on Microsoft stock but lowered his price target to 58 from 59. UBS analyst Brent Thill maintained his buy rating and price target of 60 on Microsoft stock. The company’s cloud-based businesses, including Azure and Office 365, continue to exhibit strong performance and Microsoft is seeing strong renewals and ARPU (average revenue per user), he said. RBC Capital Markets analyst Ross MacMillan maintained his outperform rating on Microsoft stock, but cut his price target to 61 from 63. Image provided by Shutterstock .

Proofpoint Smashes Q1 Views, Guides 2016 Up On ‘Momentum’

Proofpoint ( PFPT ) smashed Wall Street’s first-quarter expectations late Thursday, thanks in part to a $5 million billings pull-through, and boosted 2016 guidance by $5 million at the midpoint, prompting shares to rocket Friday. In early trading on the stock market today , Proofpoint stock jumped as much as 8% before paring the advance to a 2.5% gain in mid-morning trade, near 55. Shares are down more than 15% this year, but they have recovered 50% from a Feb. 8 bottom at 36.60 on concerns of a slowdown in IT spending. For Q1, Proofpoint reported $79 million in sales, up 37% year over year, and a 9-cent loss per share ex items vs. a 14-cent loss in the year-earlier quarter. Billings came in at $98.3 million, up 48%. All three metrics topped the high end of Proofpoint’s guidance. The analyst consensus, meanwhile, had modeled $76.3 million in sales and a 14-cent loss per share. During Q1, Proofpoint’s protection and advanced threat segment — which represents 71% of sales — grew 47% year over year, CFO Paul Auvil said on the late Thursday conference call. TAP (targeted attack protection) nearly doubled and accounted for half of all new add-on business, he said. Pacific Crest analyst Rob Owens called it a “sign o’ the times (as) momentum continues,” and maintained his overweight rating and 66 price target on Proofpoint stock. “Proofpoint remains in the winners’ camp relative to our bifurcation thesis, as results meaningfully outpaced expectations for the quarter,” he wrote in a research report. “Q1 was demonstrative of the multiple layers of potential upside for Proofpoint.” Current-quarter guidance for $83.5 million to $84.5 million in sales and $94 million to $96 million in billings would be up a respective 32% and 26% year over year. Proofpoint sees a per-share loss of 7-8 cents vs. a 9-cent loss in the year-earlier quarter. Billings guidance was slightly short of analyst views for $100 million, but Piper Jaffray analyst Andrew Nowinski credited that to $5 million in early renewals that typically would have been factored into Q2. Nowinski retained his overweight rating and 76 price target on Proofpoint stock. Proofpoint also bumped up its full-year guidance. Partnerships with Intel ( INTC ) and Palo Alto Networks ( PANW ) haven’t yet been factored into guidance but are contributing to the pipeline, Nowinski wrote. “They did say revenue from a number of customers is double what they spent with Intel since they bought additional products like TAP or privacy,” he wrote in a report. “This suggests the overall opportunity could be larger than initially estimated.”

Yahoo Not Alone, Many Techs Facing Active, Agitated Shareholders

In recent years, no industry has provided shareholder activists with as many opportunities to force changes — or generate financial gains — as technology. In its Shareholder Activism 2015 report issued last November, Moody’s found that 33% of the 178 shareholder activism cases it had tracked through Oct. 15 of last year focused on tech firms, far more than any other industry. Tech firms, ironically, can blame their successes as well as their failures for their preferred status among shareholder activists. The sector’s growth potential attracts the hedge funds and equity investors that are less inclined to sit docilely on the sidelines. “You really have to have a stomach for it,” said Gerry Granovsky, an analyst at bond rating firm Moody’s Investor Service. “A lot of it is confrontational. You have to not be afraid to ruffle feathers.” Where many of the most famous shareholder activism cases have focused on poorly managed companies that represented turnaround opportunities — which does include a fair number of tech companies, to be sure — many tech firms instead have been targeted for not sharing their riches enough. Granovsky points out that as the tech sector has demonstrated historic stability over the past 10 years, it has enjoyed growing access to debt. Meanwhile, as scores of tech firms have grown into thriving global businesses, many have amassed massive amounts of cash overseas and have chosen to keep it there rather than pay U.S. tax rates. Apple Finally Convinced To Share Some Wealth It’s that cash, and companies’ explanations for hording it, that often attracts the attention of shareholder activists more than anything. “Activists don’t care about policies. They see Apple having $216 billion in cash,” Granovsky said. “To some extent they have a point.” The activities of shareholder activists do at least potentially benefit a larger group of stakeholders, and shareholder activists do function as a sort of corporate watchdog, so they have to be willing to get dirty for the cause. After finding itself on the receiving end of pressure from big-name shareholder activists Carl Icahn and David Einhorn, Apple ( AAPL ) has in the past couple of years been returning cash to shareholders in programmatic fashion. Similarly, persistent pressure from activists helped spur ATM maker NCR ( NCR ) to embark on an effort to buy back $1 billion worth of stock, funded by a deal with Blackstone that gives the financial advisory firm three seats on NCR’s board — a deal activist investor and NCR shareholder P. Schoenfeld Asset Management has questioned. Targeting excess cash is not a new shareholder activism strategy. In fact, it appears to have been one of the original strategies. In his just released book, “Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism,” Jeff Gramm, a portfolio manager and adjunct professor at Columbia Business School, traces shareholder activism back to the 1920s. Gramm explores a 1927 case in which economist and investor Benjamin Graham, considered the father of value investing, led an effort to get Northern Pipeline to release some of its stockpile of unused cash back to its shareholders. That strategy has been used against tech firms to great effect in recent years, with a number of companies succumbing to similar pressures. And Granovsky says that trend might not peak until interest rates rise, causing tech firms to slow their borrowing and instead start tapping those overseas cash reserves. No worries. Even if all the cash-rich tech companies start giving back to shareholders, there are always underperformers to turn around. Microsoft, Qualcomm Also Among Those Targeted Despite the stability in the tech market Granovsky points to, there are plenty of tech companies that have found themselves in activists’ cross-hairs for other reasons. In 2013, Microsoft ( MSFT ) granted its first board seat to an activist — ValueAct Capital — after facing widespread criticism for being a step behind a series of emerging tech trends such as cloud computing and mobility. Last year, Qualcomm ( QCOM ) launched a “strategic realignment plan” after activist hedge fund Jana Partners began pressuring the company to spin off its struggling chip business from its profitable licensing business. Also last year, eBay ( EBAY ) spun off PayPal ( PYPL ) after pressure to do so from several activists, led by Icahn, who argued that both companies would perform better if separated. More recently, Yahoo ( YHOO ) has been girding itself for a battle with one of its biggest shareholders, activist Starboard Value, as the Internet giant has been unable to forge much revenue growth in the past decade. Consider the case of Motorola Solutions ( MSI ). Shareholder activists have besieged the company since 2007, when its former entity, Motorola, was embroiled in a series of legal skirmishes over allegations the company had made misleading financial statements. (It eventually split into two companies in 2011, establishing Motorola Solutions as a communications provider, while it spun off the cellphone business into a separate company, Motorola Mobility, acquired by Google in 2011 and then sold to China’s Lenovo in 2014.) Between 2007 and 2015, Motorola granted board seats to at least three shareholder activists: Icahn, ValueAct and Silver Lake Partners, according to Investopedia. Shep Dunlap, an investor relations spokesman at Motorola Solutions, spoke with IBD about the company’s experience with ValueAct, describing the relationship as “generally collaborative” and nothing like the contentious battles for which other shareholder activists, such as Icahn, have become known. “Their approach has been much more constructive with management rather than using the press and media as a mouthpiece,” says Dunlap said. Motorola Solutions Cut $550 Million In Costs, With Prodding He says ValueAct’s objectives have been aligned with Motorola’s leadership from the get-go, and that ValueAct’s guidance has helped streamline the company. In particular, he cites more than $550 million in costs removed since 2012, and $12 billion returned to shareholders, mostly through stock buybacks. “There’s been a lot of progress in terms of optimizing our cost structure,” Dunlap said. “We’re really a pure-play mission-critical communications company at this point.” Naturally, ValueAct has profited from the relationship, and today still owns 4.7% of the company’s stock, a stake worth about $619 million based on the current valuation of $13.2 billion. Dunlap points to the fact that ValueAct has been a Motorola shareholder since 2011, longer than most activists stick around, as evidence of its commitment to the company’s long-term health. He said not every activist is out to create a firestorm, cash out, and move on. “You have to keep an open mind when you’re learning about an investor, whether it’s an activist or not,” he said. “I think every company should use the feedback that’s available to them from the investor community.” Its unlikely that the relationship has been as Pollyannaish as Dunlap paints it. Granovsky stopped short of describing shareholder activism as bullying, but was comfortable calling it intimidation. “Companies don’t want to deal with activists,” he said. That said, there are times when they’re a necessary evil if a company is to thrive, and Motorola may be an example of this. One thing is certain: Shareholder activists aren’t going anywhere, and tech companies, and their piles of cash and occasional missteps, are clearly in their sights.