) fiscal third-quarter earnings of 72 cents beat the Zacks
Consensus Estimate by 5 cents, or 7.5%. This was better than the
5.5% average positive surprise in the preceding four quarters,
sending share prices up 2.9% in extended trading.
Revenue of $20.49 billion was down 4.5% sequentially and up
17.7% from last year, more or less in line with our estimates.
All segments grew strongly from the year-ago quarter and declined
only slightly from the seasonally strong Dec quarter. Microsoft
Business Division grew both sequentially and year over year.
and Windows Live Segment generated 28% of Microsoft's quarterly
revenue, down 3.0% sequentially and up 23.3% year over year.
Microsoft stated that two-thirds of enterprise desktops had
migrated to Windows 7, three-quarters of new enterprise
agreements included Windows and volume licensing deals grew
OEM revenue was in line with x86 demand, according to
Microsoft. While this may be considered good, it is a fact that
the market itself is shrinking as PCs give way to mobile
computing, so this is the primary drag on the Windows business.
Non-OEM revenue grew 40%, driven by the Surface tablet and
commercial sales of Windows.
Microsoft Business Division
, which generated 31% of revenue, grew 11.0% sequentially and
8.7% from last year. The business side grew 10%, of which
multi-year licensing grew 16%. The consumer side more or less
reflected consumer PC trends, benefiting from increasing attach
rates and the subscription model, which saw strong initial
The new Office, which incorporates touch, social and mobile
aspects and SkyDrive, which can be used to access files across
devices are expected to drive revenues going forward. Microsoft
stated that revenue from other products, such as SharePoint,
Exchange and Lync increased double-digits, with Lync alone
increasing more than 30% (90 of the Fortune 100 using Lync).
Server & Tools
segment, at 25% of total revenue, was down 2.8% sequentially and
up 10.2% year over year. Microsoft's multi-year licensing revenue
grew 20% year over year, with SQL server up 16%.
The services side also strengthened, growing 11% from last
year. Based on System Center growth of 22% and share gains with
Hyper-V (virtualization product), Microsoft stated that it was
seeing growth in the data center segment as well. Overall trends
indicate continuing strength in the enterprise. Virtualization
and cloud computing are proving to be very beneficial for
Microsoft's S&T business.
Microsoft generated 12% of revenue from the
Entertainment & Devices
segment, down 32.9% sequentially and up 56.6% year over year. The
sequential decline was because of seasonality. The increase from
the year-ago quarter was related to an 18% increase in Xbox Live
members to more than 46 million and transactional revenues that
grew at twice the rate. Windows Phone also contributed to the
increase according to Microsoft.
Skype, acquired from
) in 2010 had minutes touching 161 billion, up 56% from last
business, or online advertising, generated 4% of revenue, down
4.3% sequentially and up 17.7% 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 76.6% increased 316 basis points
(bps) sequentially and shrank 66 bps year over year. The gross
margin is closely related to the mix, since margins on hardware
and software products differ widely. Therefore, the decline in
Entertainment & Devices revenue (mostly hardware) positively
impacted the sequential comparison.
Operating expenses of $8.09 billion were up 1.2% sequentially
while declining 14.2% from last year. On a sequential basis,
R&D and G&A increased 110 bps and 269 bps, respectively
as a percentage of sales. Cost of sales and G&A grew 66 and
148 bps, respectively from last year. All other were down.
The operating margin by segment was as follows-Windows 60.7%
(a sequential increase of 461 bps), Microsoft Business Division
64.9% (up 230 bps), Server & Tools 39.3% (down 162 bps) and
Entertainment & Devices 13.5% (down 229 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 $6.06 billion,
or 29.6% net income margin compared to $6.38 billion, or 29.7% in
the previous quarter and $5.11 billion, or 29.3% in the year-ago
Inventories were up 28.4%, which lowered inventory turns from
13.7X to 9.0X. Days sales outstanding (DSOs) went to 53, up from
around 61 at the end of the Dec 2012 quarter.
Microsoft ended with a cash and short term investments balance
of $74.48 billion, up $6.17 billion during the quarter. The net
cash position was around $60.29 billion, up from $54.12 billion
at the beginning of the quarter. In the last quarter, the company
generated $9.67 billion in cash flow from operations, spent $1.03
billion on share repurchases, $1.93 billion on dividends, $108
million on acquisitions and $930 million on capital assets.
Microsoft lowered its 2013 opex expectations to $30.2-30.5
billion (previous $30.3 to 30.9 billion), which excludes the
European Commission fine of $733 million. The tax rate for the
year is expected to be 17-20% (maintained) and capital expenses
around $3.5 billion (maintained).
The only major surprise was with respect to the Windows
business, which did better than expected given the weak PC
market. While IDC has stated that Windows 8 had not helped PC
shipments and in fact contributed to its decline, we were not
disappointed because Win 8 was targeted at touch-based devices
and not the traditional PC market.
The traditional desktop/notebook segment continues to migrate
to Windows 7 albeit at a slower rate. Microsoft remains strong in
the enterprise segment, which is again more likely to purchase
traditional computers. Windows 8 is supplementing these sales by
helping to build the company's position in the mobile segment.
While mobile growth is not expected to be quick or easy,
Microsoft has set foot in the right direction.
Other positives include Microsoft's growing cloud business,
improving prospects for its S&T business, the subscription
model for consumers in the MBD business, strong position in the
game console segment and growing search market share.
Microsoft's new touch-based devices may be expected to
supplement its growth in other areas. However, competition from
popular platforms by
), Samsung and others makes growth difficult.
While the search business is growing steadily, Microsoft is
still way behind market leader
). Google has had phenomenal success in the mobile segment.
Microsoft's focus on mobile hardware is therefore very important.
In the meantime, the cannibalization of its core x86 market
remains an overhang on the shares.
Microsoft shares currently carry a Zacks Rank #3 (Hold).
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