) fiscal second-quarter earnings of 76 cents beat the Zacks
Consensus Estimate by a penny.
Revenue of $21.46 billion was up 34.0% sequentially and 2.7%
from last year, in line with our estimates. All except the
Entertainment & Devices segment grew both sequentially and
from the year-ago quarter. Entertainment & Devices were down
year over year.
and Windows Live Segment generated 27% of Microsoft's quarterly
revenue, up 81.3% sequentially and 24.2% year over year.
Microsoft stated that over 60 million Windows 8 licenses were
sold to date and more than 60% of enterprise desktops had
migrated to Windows 7. OEM revenue outdid x86 demand according to
Microsoft, reflecting underlying demand in the channel.
Non-OEM revenue grew 40%, driven by Windows 8, the Surface
tablet and volume licensing deals (up double-digits). Similar to
past quarters, the x86 section of the market saw emerging markets
doing better than developed markets and business PCs better than
consumer PCs. Microsoft attributed part of the softness on the
consumer side to the stronger-than-expected demand for touch
Microsoft Business Division
, which generated 27% of revenue, grew 3.4% sequentially while
declining 9.4% from last year. The business side grew 4%, of
which multi-year licensing grew 10%. However, the consumer side
impacted segment performance, as tablet cannibalization of
x86-based PCs outdid the impact of growing attach rates.
Microsoft stated that revenue from other products, such as
SharePoint, Exchange and Lync increased double-digits.
Server & Tools
segment, at 24% of total revenue, was up 13.9% sequentially and
8.7% year over year. Microsoft's multi-year licensing revenue
grew more than 17% year over year, with SQL server up 16% and
System Center around 18%. Overall trends indicate continuing
strength in the enterprise. Virtualization and cloud computing
are proving to be very beneficial for Microsoft's S&T
Microsoft generated 18% of revenue from the
Entertainment & Devices
segment, up 93.8% sequentially and down 11.0% year over year. The
holiday season was the main reason for the sequential increase,
video game deferrals impacted the year-over-year comparison.
Xbox remains the leading console at 5.9 million units with the
Halo 4 gaming franchise (launched in Nov 2012) achieving
best-seller status. Microsoft also stated that Xbox Live members
touched 40 million.
Windows Phone sales were 4X the level reached in the year-ago
Skype, acquired from
) in 2010 had minutes touching 138 billion, up 59% from last
business, or online advertising, generated 4% of revenue, up
24.7% sequentially and 10.8% year over year. Microsoft is
investing in technology and innovation and it is this work that
is improving user experience and helping Bing take some share in
the U.S. The revenue per search (RPS) continued to improve in the
Microsoft's gross margin of 73.5% dropped 49 basis points
(bps) sequentially and increased 47 bps year over year. The gross
margin is closely related to the mix, since margins on hardware
and software products differ widely. Therefore, the increase in
Entertainment & Devices revenue (mostly hardware) hurt the
sequential comparison, despite growth in other segments.
Operating expenses of $7.99 billion were up 22.4% sequentially
and 10.2% year over year. The operating margin of 36.2% expanded
306 bps sequentially although shrinking 206 bps from last year.
All expenses increased sequentially as a percentage of sales,
with R&D (up 196 bps) and S&M (up 170 bps) being the most
The operating margin by segment was as follows-Windows 56.0%
(a sequential increase of 531 bps), Microsoft Business Division
62.6% (down 362 bps), Server & Tools 40.9% (up 250 bps) and
Entertainment & Devices 15.8% (up 1,482 bps). The Online
Services business continues to generate a loss, although narrower
than in the past.
The company generated a pro forma net income of $6.38 billion,
or 29.7% net income margin compared to $4.47 billion, or 27.9% in
the previous quarter and $6.62 billion, or 31.7% in the year-ago
Inventories were up 2.3%, which lowered inventory turns from
10.3X to 13.7X. Days sales outstanding (DSOs) went to 61, down
from around 56 at the end of the Sep 2012 quarter.
Microsoft ended with a cash and short term investments balance
of $68.3 billion, up $1.67 billion during the quarter. The net
cash position was around $54.12 billion, down from $54.69 at the
beginning of the quarter. In the last quarter, the company
generated $4.78 billion in cash flow from operations, spent $1.66
billion on share repurchases, $1.93 billion on dividends, $311
million on acquisitions and $930 million on capital assets.
Microsoft maintained its 2013 opex expectations of a 6%
increase to $30.3 to 30.9 billion. The tax rate for the year is
expected to be 17-20% (previous 19-21%) and capital expenses
around $3.5 billion (unchanged).
Microsoft had a more or less regular quarter, with revenue
coming in somewhat better than normal seasonality. The many new
products across segments, strength in the cloud computing segment
and share gains in search combined to generate the encouraging
results. Its leadership position in the gaming segment and Halo 4
also had a positive impact.
Microsoft said that demand for its new touch-based devices was
well in excess of supply, which contributed to the weakness in
consumer sales. Additionally, competition from popular platforms
), Samsung and others makes growth in the mobile segment
While the search business is growing steadily, Microsoft is
still way behind market leader
). Google has had phenomenal success in the mobile segment and
its position here is practically unshakeable. Microsoft's focus
on mobile hardware is therefore very important. In the meantime,
the cannibalization of its core x86 market remains an overhang on
Microsoft shares currently carry a Zacks Rank #4 (Sell).
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