Q1 Preview: Microsoft (MSFT) May Gain on PC Sales, But Selling Price Issues Linger

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Microsoft Corp. (Nasdaq: MSFT) shares are trading lower Thursday heading into the company's quarterly earnings report.

Expected out after the market closes, Microsoft should report first-quarter earnings of 68 cents per share on revenue of $17.25 billion. Earnings would be a 1.5 percent decline from 69 cents reported last quarter, and 9.7 percent gain from the same period last year. Microsoft has bested estimates by about 13.5 percent over the last four quarters, suggesting the company could report EPS of 77 cents.

Microsoft shares moved 3.7 percent lower through the quarter and are up 8 percent since the end of the quarter. Microsoft has traded in a range of $23.65 to $29.46 over the last 52-week time frame.

Microsoft trades for 8.6x next years earnings expectations, compared with 10.4x at Apple (Nasdaq: AAPL), 11.9x for Oracle (Nasdaq: ORCL), and 13.4x for Google (Nasdaq: GOOG).

Data from Bloomberg has 25 analysts with a Buy on Microsoft, 10 at Hold, and one suggesting to Sell. The price target average is $32, with a low of $28 and high of $35.

Analyst Commentary

  • Goldman Sachs sees earnings of 67 and revenue of $17.1 billion. Goldman says checks point to "slowdown in certain areas of IT spend in the September quarter versus the first half of 2011."

    Continuing, "Our channel conversations also suggest that customers feel as if they can more easily delay certain Microsoft related spend (e.g. SQL server and Office). With that said, we would note that Microsoft likely benefited from deals that pushed from the June quarter to September, which could help to offset some softness due to the macro backdrop. Overall, we see the potential for the company to post results slightly below consensus for revenue and EPS."

    Goldman sees Windows revs of $4.88 billion, server and tools revenue of $4.305 billion, MBD revs of $5.30 billion, and Online Services Division revs of $618 million.

  • JPMorgan sees earnings of 65 cents per share on revenue of $17.057 billion. JPMorgan notes while PC growth is expected in the quarter, most will come from emerging markets where Microsoft's average selling price is lower. "The tablet phenomenon is one factor in the weak growth prospect for PCs, and we expect this will only be exacerbated as Amazon.com enters the market with a relatively inexpensive tablet model. We do not expect Microsoft will be competitive in the tablet market for at least another year when Windows 8 is likely to be GA'd."

  • Deutsche Bank is looking for an in-line quarter from Microsoft. The firm is modeling for earnings of 66 cents per share and revs of $17.1 billion. "Our PC analyst forecasts PC unit growth of -6% y/y in the US and -4% y/y in Western Europe for 3Q11. Even though these two regions account for about one third of the global PC shipments, high degree of software piracy in the emerging economies makes these regions the drivers of PC revenues for MSFT. Gartner also recently lowered their global forecast for PC shipment to 3.8% y/y. Western Europe and US which together make up close to 33% of PC shipments are expected to contract 12.3% and 1.2% respectively in 2011."

  • Collins Stewart is modeling EPS of 68 cents and revenue of $17.26 billion. "PC market data points suggest a continuation of several trends for the first half of this year, with weakness in consumer demand in developed markets being offset by growth in businesses and in emerging markets. Still PC's should show improving Y/Y growth relative to recent quarters, as Gartner last week indicating PC market growth of 3% (versus a 2% Y/Y decline in the first half of C2011), and comparisons ease more so for Microsoft in future quarters."

  • BGC is looking for revenue of $17.34 billion and earnings of 68 cents per share. BGC sees the current fiscal year "posing a leaner environment for positive upside surprises as the Windows 7 / Office2010 upgrade cycle starts to age. We still see activity from the corporate refresh cycle driving results but do not expect conditions and demand in the consumer PC market to meaningfully change until the release of Windows 8 next year." BGC is also bullish on Microsoft's cost controls, and sees it continuing to be the best at returning capital to shareholders.

    BGC expects revenue will continue to grow faster than expenses, despite investments in phones, search, and Windows 8 development and marketing. The firm is modeling for Windows revs of $4.7 billion, Server revs of $4.5 billion, Online of $677 million, Business of $5.7 billion, and Entertainment of $1.5 billion in revs.
Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of their release. You can also check out Microsoft's past performance at Streetinsider's Microsoft Income Statement .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: AAPL , GOOG , MSFT , ORCL

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