Earnings Preview: Microsoft

 | Jan 23, 2014 | 9:00 AM EST
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All eyes will be on Microsoft (MSFT) when it reports its second quarter fiscal 2014 results after the market close on Thursday.

As you might recall, the first quarter was fairly bland, but was just enough to get the stock moving higher. The quarter was driven by demand for enterprise products, like Office and the Azure cloud services. Server product revenue grew 12%. Surface sales rose 37% to $1.49 billion. The company sold 1.2 million Xbox consoles. And cloud computing grew 103%, off a small base.

First quarter adjusted revenue was $18.6 billion, up 7%. Operating income declined 3% and adjusted earnings per share fell 3%. Like I said, pretty bland.

For the second quarter, analysts are expecting revenue of $23.67 billion and 68 cents a share in earnings. The company is struggling to sidestep the global PC disaster that has been unfolding for the last seven quarters. According to Gartner, global PC shipments fell 7% in the fourth quarter of 2013.

Despite the Gartner data, analysts think the PC business has bottomed out. Last week, Intel (INTC) said microprocessor shipments rose 3%, driven by an increase in desktop sales. Analysts think the PC business has bottomed because Microsoft will no longer support Windows XP after April. The lack of XP support is forcing late adopters to upgrade at the last minute.

The company plans a new version of Windows next year. Some have called Windows 8/8.1 "an unmitigated disaster" and have compared it to the ill-fated Windows Vista. Last week Hewlett-Packard (HPQ) began advertising PCs pre-loaded with Windows 7 in an effort to find nostalgic customers who want to turn back the hands of time and avoid the Win 8 mess. 

The biggest driver of revenue is Office. Last quarter, Office revenue grew 5% to $6 billion. Subscriptions to Office 365, Microsoft's cloud "productivity suite," jumped past 2 million and will likely contribute an annualized $1.5 billion to the top line.

The server business continues to do well as clients increasingly adopt the Azure cloud platform. Windows Azure allows customers to quickly build and deploy applications across the Web.  Clients can run backend databases for mobile applications, crunch big data problems or a bunch of run virtual machines over a wide range of enterprise applications. 

The online business is improving. Although the business continues to produce losses, online ad revenue grew 15% last quarter driven by increasing market share. Bing took 1.7 points of share and now has an estimated 18% of the online search business.

Analysts expect a big holiday quarter from video games. The company told analysts it had sold 3 million Xbox One consoles from the Nov. 22 launch to the end of last year.   Any upside to the quarter could come from this division.

The first half of the year are the two best quarters for Microsoft, so unless the company guides third quarter better than expected, I think the stock will drift in a tight range. The "good news" is in the stock. For the year, analysts expect $87.7 billion in revenue, up 7.5%, but earnings per share are expected to come in at $2.66, basically flat with last year.

I know there are a lot of Microsoft bulls out there, but I really can't get excited about this stock. (Maybe its because I am an Apple (APPL) user and gave up on Microsoft years ago?)

The value hounds have been pounding the table on Microsoft since forever, but with so-so quarters from Intel and IBM (IBM) it's hard to get on board the Microsoft bus.

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