) first quarter earnings of 53 cents missed the Zacks Consensus
Estimate by 4 cents, as PC market slowdown and stock clearance
before the Windows 8 launch impacted revenue growth.
Revenue excluding deferrals of $16.01 billion was down 11.4%
sequentially and 7.9% from last year, missing estimates by 2.5%.
All except the Entertainment & Devices segment contributed to
the sequential decline in the last The softness in Windows was
not surprising, since customers were expected to delay purchases
ahead of the Windows 8 launch.
and Windows Live Segment generated 20% of Microsoft's quarterly
revenue, down 21.7% sequentially and 33.4% year over year. The
Windows 8-related stock clearing was more or less as expected,
but Microsoft's results were also impacted by the PC market
slowdown that impacted
Advanced Micro Devices
The consumer segment was worse impacted than enterprise (as
expected), with transaction revenues declining in both. Microsoft
was however upbeat about multi-year licensing revenue, which grew
15% year over year.
While there was no alleviation in pressure from tablets,
) iPad, Microsoft mentioned that it had certified over a thousand
unique Windows 8 systems, including tablets, convertibles,
laptops and all-in-ones. So growth rates should pick up in the
Microsoft Business Division
, which generated 34% of revenue, dropped 12.5% sequentially and
2.1% from last year. Here too, the weakness in the PC market
impacted transactional revenue. However, multi-year licensing
revenue grew 8%.
Microsoft stated that other products such as SharePoint,
Exchange and Lync remained strong. Microsoft's success with CRM
) something to worry about. In the last quarter, Dynamics CRM
grew over 30%. The acquisition of Yammer added best-in-class
enterprise social networking expected to boost its cloud
Server & Tools
segment, at 28% of total revenue, was down 10.6% sequentially
while growing 7.1% year over year. Microsoft's multi-year
licensing revenue grew more than 19% year over year, with SQL
server up more than 20% and System Center around 20%. 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, up 9.4% sequentially and flattish year over year. The
segment is finally showing signs of sustainable improvement and
will benefit from the holiday season in the current quarter.
Despite the market weakness that contributed to the 29%
decline in Xbox units, Microsoft increased market share during
the quarter from 47% to 49%. The newly introduced SmartGlass will
help connect phones, PCs and tablets to Xbox, which is expected
to attract more users to the platform.
Management did not shed light on Windows Phone units, but said
that the device lineup for Win 8 was significant
Skype, acquired from
) in 2010 had minutes touching 120 billion, up 58% from last
business, or online advertising, generated 4% of revenue, down
5.2% sequentially while growing 11.5% year over year. We think
that 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 partnership with
) remains on track, with increasing ROI for advertisers. But
monetization remains below expectations. The company wrote down
goodwill on the aQuantive acquisition in the last quarter.
Microsoft's gross margin of 74.0% dropped 298 basis points
(bps) sequentially and 430 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
combined with the decline in other segments resulted in a weaker
gross margin. The search agreement with Yahoo also remains,
raising online services and traffic acquisition costs.
Operating expenses of $6.53 billion were down 13.0%
sequentially and up 2.2% year over year. The operating margin of
33.2% dropped 220 bps sequentially and 830 bps from last year.
S&M expenses declined 254 bps as a percentage of sales, but
was offset by increases in all other costs.
The operating margin by segment was as follows-Windows 50.7%
(a sequential decline of 709 bps), Microsoft Business Division
66.3% (up 109 bps), Server & Tools 38.4% (down 274 bps) and
Entertainment & Devices 1.0% (down 274 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 $4.47 billion,
or 27.9% net income margin compared to $5.70 billion, or 31.6% in
the previous quarter and $5.7 billion, or 33.0% in the year-ago
Inventories were up 42.8%, which lowered inventory turns from
14.6X to 10.3X. Days sales outstanding (DSOs) went to 56, down
from around 80 at the end of the June quarter.
Microsoft ended with a cash and short term investments balance
of $66.6 billion, up $3.6 billion during the quarter. The net
cash position was around $54.69, up from $51.10 at the beginning
of the quarter. In the last quarter, the company generated $8.48
billion in cash flow from operations, spent $1.63 billion on
share repurchases, $1.68 billion on dividends, $1.15 billion on
acquisitions and $603 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 19-21%, capital expenses of around $3.5
Microsoft had a more or less regular quarter, with Windows
revenue impacted by purchase deferrals and S&T and Business
Division also impacted by weakness in the PC market. Windows
Phone numbers are encouraging, although the growth is off a small
base. However, it is significant that the company was able to
grow share in the gaming segment, considering the condition of
the market and we think the platform approach here is the way to
Of course, we recognize the danger of tablets that are still
largely based on iOS or Android, since these devices are eating
into its netbook sales. Microsoft's Surface could be a
game-changer and Win 8 will stimulate growth over the next few
However, growth in Windows 8 will be tempered by dynamics in
the PC market and therefore think the shares will not gain much.
The Zacks Rank on Microsoft shares is #3, which implies a Hold
recommendation in the short-term (1-3 months).
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