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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