Earnings Preview: Microsoft
Microsoft Corp. (MSFT) is scheduled to announce its first quarter fiscal 2013 results on October 18, 2012, and we notice downward movements in analyst estimates.
Prior-Quarter Synopsis
Microsoft’s fourth quarter non-GAAP earnings of 74 cents exceeded the Zacks Consensus by 11 cents, or 17.5%.
Revenue was up 3.7% sequentially and 4.0% from last year to $18.05 billion. All except the Windows segment contributed to the increases in the last quarter, although Server & Tools and Entertainment & Devices were particularly strong.
Gross margin was 76.9%, down 35 basis points (bps) sequentially and 170 bps year over year. The significant decline from the year-ago quarter was mainly on account of payments made to Nokia (NOK) with respect to joint strategic initiatives, the inclusion of Skype and higher headcount expenses. An unfavorable mix also hurt margins in the last quarter.
Management Guidance
Management did not provide any specific revenue and margin guidance for the first quarter of 2013, but maintained its 2013 opex expectations of a 6% increase to $30.3 to 30.9 billion.
(Detailed earnings results can be viewed in the blog titled: Microsoft Gains as Earnings Grow
Agreement of Analysts
Estimate revisions for the upcoming quarter indicate declining sentiments, with 16 out of 27 analysts making downward revisions in the last 30 days. Also, for fiscal 2013, 13 out of 31 analysts made downward revisions, with none moving in the opposite direction.
The majority of the analysts expect a weak first quarter with revenue and earnings coming in well below the Zacks Consensus estimate of $16.58 billion and $0.60, respectively due to a weak PC environment and a challenging global economy.
According to recent preliminary results by the market research firm, Gartner, worldwide PC shipments were down 8.3% from the comparable prior-year quarter to 87.5 million units in the third quarter as the market prepares for the launch of Windows 8.
The analysts also believe that a few customers are holding back their purchases owing to the forthcoming release of Windows 8. With lower-than-expected shipments, the analysts do no expect Windows and Windows Live (:WWL) to report strong results in the upcoming quarter. Infact, Microsoft Business Division (:MBD) could also be impacted from the greater-than-projected PC decline as approximately 40% of MBD revenue comes from the PC-driven transactional business.
They also expect gross and operating margins to contract as the revenue contribution of lower-margin businesses increases. Analysts believe that Microsoft’s Windows business continues to be pressured by tablets and is becoming a smaller portion of overall revenues. Additionally, the company has increased R&D and S&M expenditure on the launch of various new products that will hurt margins.
However, the analysts expect the other divisions to perform well in the quarter. The Entertainment & Devices segment is expected to do well, driven by continued robust sales of Xbox/Kinect. Longer term, the analysts remain positive on Microsoft given its strong 2012-13 product cycle around the Windows 8 client, server, cloud and mobile. They believe that Windows 8 can help Microsoft address the tablet market, increasing the demand for low-end notebooks.
Magnitude of Estimate Revisions
As the majority of analysts have lowered their estimates over the past 30 days, the Zacks Consensus Estimate has fallen 3 cents to 57 cents for the first quarter and 2 cents to $3.00 for fiscal 2013. In the past 90 days, the Zacks Consensus Estimate fell 10 cents for the upcoming quarter and 8 cents for fiscal 2013.
Our Recommendation
Given the challenging macro-environment coupled with ongoing weak consumer demand and further cannibalization of the PC market by tablets, we do not expect a great first quarter.
We also believe that the release of Windows 8 will not be a major help to the ailing PC market in the near term as businesses tend to be conservative when it comes to upgrading Windows. There are still a lot of companies which haven’t upgraded from Windows XP.
Despite the relatively lackluster quarter, we believe Microsoft remains one of the best positioned software vendors, given its wide range of products, emerging markets strength, continued technology deployment at data centers and growth in cloud computing.
However, the company sees increasing competition from Google’s (GOOG) Android and Apple’s (AAPL) iOS. Therefore, Microsoft shares currently carry a Zacks Rank of #3, implying a Hold recommendation for the short term (1-3 months).
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