Microsoft: Better Than Expected Q4 Earnings
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Microsoft (NASDAQ: MSFT) recently reported better than expected 4Q12 Earnings. The company’s revenues rose 7% Y/Y to $18.6 billion (after adding back the $540 million in tech guarantee deferrals), which beat consensus estimates of $18.2 billion. Its reported EPS at 0.73 was also ahead of analyst estimates at 0.62. Operating margins were booked at a healthy 37.2%.
Key Takeaways:
1) The Business division showed strong 7.1% Y/Y growth and reported the highest revenues among all the segments at $6.3 billion.
2) Windows Server Premium increased double digits and SQL Server and system center sales increased 20%, driving an increase of 12% in product revenues. Enterprise services grew 15% as the Server & Tools business segment contributed $5.1 billion in revenue and 12.6% Y/Y growth.
3) The Windows/Live division posted almost flat Y/Y revenues of $4.6B after adding back the $540 million in tech guarantee deferrals.
4) The Online Services division reported revenue of $735M, growing 8.1% Y/Y. Overall growth was primarily led by online advertising sales which increased 12% Y/Y.
5) The Entertainment & Devices Division rose 20% Y/Y and posted revenues of $1.8 billion. Windows phone sales grew more than 50% sequentially, while Xbox continued its leadership in the soft console market with 47% of US market share in June.
Analysis:
We believe Microsoft has posted quite solid earnings considering the macroeconomic factors and the FX headwinds. Microsoft posted growth in all of its segments except the Windows/Live division, which decreased ~1% Y/Y. The company saw strong demand in its Server and Tools business and its Business division which offset the weakness in the PC sales division. The weak sales in the PC division were to be expected considering that it is the ending of the Win7/Office 2010 cycles and that there is increasing pressure from Apple’s (NASDAQ: AAPL) iPad sales growth (See Apple’s Consolidation Provides a Good Buying Opportunity for a more detailed analysis on Apple). The business division was mainly driven by a 14% revenue growth of multi-year licensing, which made up over 40% of total business division revenues for 4Q12. There were many positives on the server side business such as the growth of Windows server premium and enterprise services. The new server offering, Lync, grew over 45% Q/Q while Office remained the number one productivity application, and today is on more than 1 billion PCs worldwide according to an estimate from Microsoft. Operating income rose 12.2 % Y/Y to $6.9 billion showing continued cost discipline. We expect operating income will continue its uptrend in the coming quarters, as well, given that Windows 8 is near its launch date and the R&D expenses would reduce considerably after the launch.
Going Forward:
As the next quarter marks the launch of Windows tablet-friendly OS, we expect Microsoft to gain standing in the tablet market, which is currently dominated by Apple iOS and Google’s (NASDAQ: GOOG) Android (See Google: Solid Q2 Earnings – Keeping a Bullish View for the analysis of Google’s latest earnings). We are positive on Windows 8, given consumer preference for Windows due to reliability. Also, it will help PC makers achieve a level playing field with mobile handset makers in the tablet space. PC OEM’s will prefer windows, as it will result in less R&D costs compared to building a whole ecosystem for Android, in which the mobile handset makers currently have an edge. (See Microsoft's Outperformance: You Ain’t Seen Nothing Yet for detailed overview). We maintain our bullish views on Microsoft keeping in view strong quarterly results, upcoming new product releases, and a low PE multiple of 9.13.
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