) is set to announce its Q1 FY 2014 earnings on Thursday, October
24. During the quarter, the company unveiled its reorganization
strategy that transforms Microsoft into a "devices and services"
company. Moreover, Microsoft's CEO Steve Ballmer announced that he
will retire from the company within the next year. Additionally,
the company is also in the middle of closing one of the most
significant transactions in its corporate history. The company paid
more than $7 billion to buy Nokia's devices and services business
so that it can compete with incumbents Apple and Samsung.
In this earnings report, we are on the look out for a number of
key announcements including the future leadership of the company
and strategy for its new launches. Additionally, we are closely
following the growth areas in various division of Microsoft.
See our complete analysis of Microsoft here
Device and Software Launch Strategy To Take Center
With the global PC shipments still reeling from decline in
demand, Microsoft is increasingly pursuing its devices and services
strategy to reduce its reliance on PCs and expand its footprint
into hardware and cloud services domain. The company is set to
launch a host of devices and services in the coming month. Apart
from the launch of new Surface tablet and the upgrade to its
flagship Windows OS this month, the company is also set to release
Xbox-One in the coming month. While the company continues to search
for the next CEO to replace Steve Ballmer, we expect the company to
share its strategy for new launches during this earnings
Office Cloud Adoption To Gain Traction
Microsoft's biggest revenue driver is its Office productivity
suite and makes up almost 40% of its stock value according to our
estimates. During Q4 FY13, Microsoft's revenues from this division
grew by 14% to $7.21 billion, mainly due to increasing adoption of
Office 365 that clocked in over one million subscribers and a $1.5
billion annual revenue run rate. The company announced a number of
steps such as free Office 365 access to students to ensure that it
continues to dominate the industry. We believe that these steps
will augur well for the company and help it in maintaining its
market share in the future. Currently, we estimate that the company
has close to 93% share in productivity market. In the upcoming
earnings announcement, we expect Microsoft to report increase in
revenue run rate for Office 365 as its clients adopt the
feature-rich, cloud-based Office software.
Focus On Cloud Services To Bolster Server
Microsoft's windows server division is the second largest
business unit making up over 20% of its total value. This division
has been the fastest growing division and witnessed 8% growth in Q4
FY13, driven by higher SQL server sales and adoption of cloud based
Azure platform. We believe that the Azure platform will be a key
growth driver for Microsoft going forward as companies around the
world are looking to lower costs by adopting cloud based services.
Additionally, many Microsoft customers depend on SQL servers for
mission critical and business intelligence needs, specifically in
the big data analytics domain.
The company announced the next versions of Windows server and
system center that will strengthen its services on Cloud OS. We
believe that these servers, with cloud capability, will continue to
outpace the growth server market. Therefore, we expect the server
division to report good growth in revenues in this quarter as
PC Sales To Affect Windows OS Sales
Windows Operating System (
) is Microsoft's third largest division and makes up around 15% of
its stock value by our estimates. This division continues to report
decline in revenues due to decline in global PC shipments.
According to IDC, global PC shipments continue to decline and the
market shrank by 8% in Q3 2013. Although, Microsoft is set to
launch Windows 8.1 this month, we believe that decline in PC
shipment will continue to affect Windows OS revenues in this
quarter as well, and the company to report decline in sales.
Online Service Division (OSD)
The online services division, which includes Bing search, MSN
and aQuantive, contributes 4% to Microsoft's value according to our
estimates. This division continues to negatively impact Microsoft's
overall profitability as operating losses mount. However, this
division did report some encouraging signs in Q4 as online
advertising revenue grew 11% due to growth in search revenues from
Bing. We expect this trend to continue, and the company to report
growth in search revenues in this quarter as well. Additionally, we
forecast Bing's global market share to increase steadily throughout
our forecast period.
We currently have
$41 price estimate for Microsoft
, which is approximately 15% above the current market price.
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