Analyst Comment on Microsoft's Encouraging Metrics & Rocky N-T Challenges

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On Thursday,
Microsoft CorporationMSFT
announced financial results for the third quarter ending March 31, 2014. Chief executive officer of Microsoft Satya Nadella commented, “This quarter's results demonstrate the strength of our business, as well as the opportunities we see in a mobile-first, cloud-first world. We are making good progress in our consumer services like Bing and Office 365 Home, and our commercial customers continue to embrace our cloud solutions. Both position us well for long-term growth. We are focused on executing rapidly and delivering bold, innovative products that people love to use.”
Summary of First Quarter Results
  • Microsoft reported third quarter EPS of $0.68 versus the estimated $0.63. Earnings per share were down 6 percent from the same quarter last year.
  • Revenue came in at $20.4 billion versus the estimated $20.38 billion.
  • The company reported gross margin of $14.46 billion and operating income of $6.97 billion.
  • Commercial revenue grew 7 percent to $12.23 billion. Office 365 revenue grew more than 100 percent and Azure revenue was up more than 150 percent.
  • Devices and consumer revenue grew 12 percent to $8.30 billion. Windows OEM revenue grew 4 percent and Surface revenue grew over 50 percent to $500 million.
Fourth Quarter Guidance
  • From the Microsoft conference call, management expects fourth quarter Commercial Licensing sales to be within $13.1-$13.3 billion.
  • D&C Licensing sales are expected to reach $4.1-$4.3 billion.
  • Microsoft sees Hardware sales in Q4 of $1.3-$1.5 billion.
  • OPEX is expected to be within $8.4 to $8.6 billion.
Analyst Respond
  • Sterne Agee analyst Robert Breza reiterated a Neutral rating noting that the current transition period will result in “uncertain estimates.” Breza wrote, “All ears were on new CEO Satya Nadella who, refreshingly engaged listeners. However, despite describing the new era as "Mobile-first, Cloud-first", he provided little specifics regarding the implementation of new orientations, including expectations for Nokia. We also believe that investors will discern behind the insistence on “execution and transition” the potential for estimate reduction during the transitional period towards the cloud/subscription model. We can only agree with the strategy but have to recognize it may be difficult to predict forward estimates and believe that the lack of specifics for the leverage of the Cloud and the Mobile strategies will keep investors cautious.”
  • Keith Weiss from Morgan Stanley remains on the “sidelines”, uncertain of near-term execution challenged and shares trading at the high end of its multiple range. Weiss commented on the headwind from consumer PC sales and the sustainability of Pro Windows OEM and Consumer Office following the Windows XP expiration. The analyst noted, “The elevated execution risk around restructuring, new business models and large acquisitions now balances the potential reward of several potential catalysts, including; 1) improving PC unit growth, 2) outperformance in the commercial licensing and devices divisions, 3) increasing exposure of the Cloud businesses and 4) increasing dividend or share buyback.”
  • Credit Suisse analyst Philip Winslow reiterated an Outperform rating and raised the price target from $42.50 to $47.50. The analyst emphasized the growing momentum and “robust adoption” of Office 365. Winslow remarked that the lifetime revenue and operating profit of Office is “meaningfully higher” than the traditional model, with customer transition adding minimum of $9 billion in revenue. Credit Suisse added that Microsoft can return to double-digit EPS growth and near-term options exist for Satya Nadella and Amy Hood to unlock shareholder value.
  • Analyst Rick Sherlund from Nomura Equity Research reported that the 9 percent gain in revenues was about as expected with Windows OEM revenues benefitting from a positive mix shift to the Pro versions of Windows. Sherlund commented that metrics on subscription and cloud based businesses were encouraging. Nomura holds a Buy rating and $45.00 price target on Microsoft.
Stock Action
Shares of Microsoft closed at $39.86 on Thursday. In Friday's trading, the stock spiked over 2.057 percent to $40.68 before falling as low as $39.75. Shares are currently trading at $39.97, up 0.276 percent.
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Posted In: Analyst ColorEarningsNewsGuidancePrice TargetManagementAnalyst RatingsCredit SuisseKeith WeissMorgan StanleyNomura Equity ResearchPhilip WinslowRick SherlundRobert BrezaSterne Agee
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