Microsoft Corp.
(
MSFT
) is scheduled to announce its third quarter fiscal 2012 results on
April 19, 2012, and we notice limited movements in analyst
estimates.
Prior-Quarter Synopsis
Microsoft's second quarter results were a couple of cents higher
than the Zacks Consensus Estimate. Though the client PC business
was slightly impacted by the Thai flooding, all other areas of the
business saw good growth in the quarter.
Revenue was up 20.2% sequentially and 4.7% from last year to
$20.89 billion, aided by the Entertainment & Devices segment,
with all segments other than Windows growing strong double
digits.
Gross margin was 73.0%, down 525 basis points (bps) sequentially
and 227 bps year over year. Higher royalty costs due to higher
transactional sales on Xbox Live and an unfavorable mix hurt
margins in the last quarter.
Management Guidance
Though management did not provide any specific revenue and
margin guidance, it lowered its fiscal 2012 operating expense
guidance to $28.5-$28.9 billion from its previous expectations of
$28.6-$29.2 billion.
(Detailed earnings results can be viewed in the blog titled:
2012 Looks Bright For Microsoft
Agreement of Analysts
One out of the 24 analysts providing estimates for the third
quarter raised the estimate, while 2 moved in the opposite
direction in the last 30 days. Over the same period, 2 analysts
made upward revisions, while 1 made a downward revision for fiscal
2012.
The majority of the analysts expect a decent third quarter with
revenue coming in line with the Consensus estimate of $17.1 billion
due to the PC environment not being as bad as earlier expected.
They also believe that the negative impact fromHDDshortages could
be less than expected. The analysts expect Windows revenue to
decline in the mid single digits, which is better than the prior
quarter, as consumers await the launch of Windows 8. However, they
expect other revenue divisions to perform well in the quarter. The
Entertainment & Devices segment is expected to do well, driven
by continued robust sales of Xbox/Kinect.
The analysts expect that the consumer segment will continue to
be impacted by the increasing popularity of tablet devices like the
iPad, but they believe that over the long run, Windows 8 can help
Microsoft address the tablet market, increasing the demand for
low-end notebooks.
On the negative side, gross and operating margins are expected
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.
Magnitude of Estimate Revisions
In the last 30 days, the Zacks Consensus Estimate dropped a
penny to 57 cents for the third quarter but remained intact at
$2.69 for fiscal 2012.
Over the 90-day period, the Zacks Consensus Estimate plunged 3
cents for both the third quarter and fiscal 2012.
Our Recommendation
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.
We expect a decent third quarter as Microsoft continues to gain
from the enterprise refresh, strength in emerging markets and cloud
computing. We also expect the entertainment division to benefit
from pre-holiday builds and new products (Mango).
Very recently, Gartner announced its preliminary PC market
results for the first quarter of 2012, stating worldwide PC
shipment would grow 1.9% year over year, above its most recent
expectations of down 1.2%. The improving PC market is definitely a
positive for Microsoft, although end demand for PCs is still
weak.
However, Windows 8 which is expected to be released in 2012 and
supports both the x86 and ARM chip architectures could be the next
big catalyst for Microsoft.We believe that the availability of
Windows applications on a tablet form factor could make the Windows
8 tablet a formidable alternative to iPad and Android tablets.
Additionally, the expected launch of a new version of the Office
suite (Office 15) and Windows Server 8 will also begin to drive
estimates higher going forward.
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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AAPL
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MSFT
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