Tech Earnings: Microsoft Stumbles, Peer Results Mixed

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So far, this earnings season hasn’t been very kind to the tech sector. Several large companies have come out with disappointing reports, even though expectations weren’t strung particularly high. Microsoft (NASDAQ: MSFT), regarded as one of the more established names in the sector, reported numbers that missed analyst expectations quite substantially. As a result, the stock tanked in after-hours trading. Let’s take a closer look at what went wrong this quarter, as well as the competition’s results.

Desktop Drama

Earnings for the period came in at $0.59, well below the $0.75 consensus. However, this number was up from a loss in the same period a year ago. Revenue also missed expectations at $19.9 billion, versus a $20.72 billion consensus. These results include a fairly huge $900 million write-down for losses on the company’s Surface tablet. Excluding this, EPS would have been $0.66, still below estimates. According to management, the company is still suffering from a substantial decline in PC sales.

The Surface tablet represents the company’s first real foray into the mobile computing hardware business, and so far it hasn’t been very well received. The company recently slashed the price quite significantly in an attempt to increase sales, but the tablet still only managed to capture a very small market share. However, it isn’t only the tablet that weighed on the company’s results.

The Operating System segment, traditionally Microsoft’s bread-and-butter industry, didn’t fare very well either, with a 6% decline in revenue. The new Windows 8 operating system has been so poorly received that it is believed to have contributed to the five consecutive quarters of slumping PC sales. Following this report, and the recently announced large-scale company reorganization, some commentators are questioning Microsoft’s ability to sustain growth in an environment where its core business is in decline.

The report wasn’t all bad though. The Server and Tools Division posted a 9% increase in revenue for the quarter and the same figure for the full year. Online Services also did rather well with a 9% increase, as did Entertainment and Devices with 8%. The company commented on strength in the Cloud Computing space, as well as Enterprise products.

Peer Earnings

Somewhat surprisingly, Microsoft’s rival Google (NASDAQ: GOOG) also posted fairly disappointing numbers for its most recent report. Revenue, while up quite substantially from the same period a year ago, missed the consensus. Earnings were also poor, coming in at $9.56 per share versus analyst estimates of $10.80 for a fairly dramatic miss. Struggling to increase its mobile ad revenue in particular, the company also saw its operating margin decline 5% to 28%. The poor results from these two tech giants weighed on Nasdaq futures last Friday.

Apple (NASDAQ: AAPL), another key rival, came out with a beat on Tuesday, although this was probably due in part to the very low expectations set by analysts. While net profit plunged from $8.8 billion to $6.9 billion for a decline of over 20%, EPS of $7.47 beat by $0.15. Revenue of $35.3 billion also came in ahead of expectations, beating by $300 million. The company’s gross margin declined substantially to 36.9%, but this too was better than analysts had expected. On the other hand, the company issued fairly soft guidance for the fourth quarter, with expected revenue of between $34 billion and $37 billion coming in below estimates.

The Bottom Line

So far, it’s been a mixed bag in terms of tech earnings. Microsoft presented fairly bad results for the most recent quarter, which led to a fairly steep decline in share price. The company has been struggling with weakness in the desktop operating system market, as well as poor results from its new tablet. Google on the other hand seems to be having a hard time increasing its mobile ad revenue. Apple did come out with some fairly encouraging numbers, beating the consensus, but the results are still a lot worse than the same period a year ago. Cautious investors would do well to wait for some more positive news from these companies.

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