The software giant, Microsoft, has surprised the market yet
again. Unlike the last quarter wherein the company surprised the
market with an earnings miss, this quarter the company beat
estimates on both revenues and earnings.
Microsoft Earnings in Focus
The company reported a 17% year-over-year jump in its fiscal
first-quarter 2014 earnings to 62 cents per share, outpacing the
Zacks Consensus Estimate by 8 cents, or 14.8%. This was
significantly better than the 3.0% average miss in the four
Though down 6.9% sequentially, revenues rose 15.7% year over year
to $18.53 billion, clearly beating our estimates by 4.1%. (Read:
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Notably, management changed the operating structure beginning this
quarter to bring in more transparency. The new reporting structure
clearly reflects the fact that Microsoft continues to derive the
majority of its profits from its Commercial business (which
accounted for nearly 60% of total revenues in the reported
quarter), as compared to its Consumer business.
The company's third-quarter earnings were primarily led by strong
sales of its cloud-based software offerings like SQL Server, Lync,
SharePoint and Exchange. This was supported by a stellar
performance from commercial cloud services, which jumped 103%
year-over-year in the quarter (read:
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Moreover, it is worth mentioning that though its Devices and
Consumer segment reported a modest growth of 4%, revenues from the
ailing Surface segment have started to pick up. Growth in volumes
aided by price cuts across its tablets range enabled the company to
drive sequential growth in surface revenues.
Additionally, Microsoft's search engine, Bing, surprised the market
with 47% growth in revenues year-over-year. It looks like Bing is
beginning to play a significant role in Microsoft's integrated
In order to boost sales of its Surface products, Microsoft recently
launched its next generation of Surface RT tablets - Surface 2 and
Surface Pro 2 tablets - although it now prefers to call this low
end version Surface (without the RT). Nokia's Lumia tablet will
join the club once the takeover formalities are completed next year
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With enhanced processing power, battery life, display and camera
resolution, market experts predict that Surface 2 is better
positioned to compete with the iPad. Moreover, Surface Pro 2
strives to compete with MacBook Air, together with Lenovo, Samsung,
With more apps and better distribution in this quarter, things can
only improve going forward.
ETFs in Focus
Driven by the revenue and sales beat, MSFT shares have soared
around 5.3% till date, post its earnings (See:
all the Technology ETFs here
Below, we have highlighted two ETFs touted to be big movers in the
coming days, given Microsoft's solid performance and strong future
growth prospects. Investors should closely monitor the movement in
these funds and could catch the opportunity from any surge in the
PowerShares Fundamental Pure Large Growth
This product tracks the RAFI Fundamental Large Growth Index and
holds a small basket of 54 stocks with a relatively smaller asset
base of $96 million.
Microsoft is the top company by asset weightings accounting for
roughly 8.72%, while Merck & Co. Inc. (MRK) with 5.79% exposure
and AAPL with 5.34% occupy the next two spots.
In terms of sectors, the fund is pretty much diversified, with
Technology comprising 28.1% of assets, followed by 18.99% Consumer
Defensive and 14.05% Energy.
The ETF has gained 4.25% in the past one month and 23% in the
year-to-date time frame.
The iShares S&P North American Technology-Software
This ETF provides exposure to companies specializing in software,
holding 60 securities in total. Large caps dominate the holding
pattern with more than 50% of asset invested while a very small
proportion of the asset base go towards mid caps and small caps
It manages an asset base of $896.4 million and has a
concentrated play in the top ten with total investment of more than
55%.The product has the largest exposure to Microsoft with 8.54% of
the total fund assets invested in the stock. Adobe and Oracle are
the other two top holdings having exposure of a little under 8%.
The fund charges a fee of 48 basis points annually. The fund
delivered a return of 21.6% over a period of one year (see
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Better-than-expected results from Microsoft have raised hopes about
the company's future prospects. The company in this era of
smartphones and tablets is leveraging its resources well with its
next generation surface range products.
Investors might therefore consider the above mentioned ETFs to cash
in on the rising trend at Microsoft.
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