Within the new business segment structure announced in July 2013, Devices and Consumer accounted for 40% of sales revenue while Commercial accounted for 60%.
The Devices and Consumer business segment reported sales revenue of $7.5 billion in the first quarter. Devices and Consumer Hardware had the greatest segment sales growth increasing from $1.1 billion in first quarter 2013 to $1.5 billion in first quarter 2014, an increase of 37%. In first quarter 2014 Devices and Consumer Hardware sales were specifically led by Surface which doubled product sales from fourth quarter 2013.
In second quarter 2014 Microsoft will begin selling its new Xbox One which should contribute significantly to Devices and Consumer Hardware sales. Continued strength in Surface is also expected in second quarter 2014 with the launch of Surface 2 and Surface Pro 2 in October. The holiday season is also expected to help strengthen Microsoft’s second quarter.
Microsoft projects total Devices and Consumer revenue to be $10.7 billion to $11.3 billion in second quarter 2014. Devices and Consumer Hardware is estimated to nearly double sales revenue from the first quarter while Devices and Consumer Licensing is expected to grow sales approximately 20%.
In first quarter 2014 the Commercial business segment reported sales revenue of $11.2 billion. Sales were led by Commercial Cloud products which grew revenue 103% and helped total sales in Commercial Other increase 28% from first quarter 2013.
Commercial Cloud is expected to continue strong growth in the second quarter 2014. In Commercial Other, strengthened demand for Enterprise virtualization and data platform products are expected to contribute to overall Commercial Cloud growth helping revenue in Commercial Other to increase within a range of 6% to 19%. Strong growth in Enterprise and continued sales in Commercial Licensing are projected to help the Commercial segment grow quarter-over-quarter revenue approximately 11%.
No new developments on Microsoft’s CEO were discussed in its first quarter 2014 earnings call. According to Bloomberg, Microsoft will likely hire its new CEO by the end of the year. Leading candidates for the job are Alan Mulally and Stephen Elop. Other internal executive candidates are also being considered.
Overall, the first quarter exceeded analysts' earnings expectations and set Microsoft up for strong fiscal year growth in 2014. The Nokia transaction which will close in third quarter 2014 is also expected to have a positive effect on earnings for the fiscal year.
The strong first quarter earnings report helped boost Microsoft’s stock return which was down 3.66% during the first quarter. Since the beginning of second quarter 2014 the stock has gained 6.88% helping the fiscal year-to-date return increase to 2.97%. Given the better than expected quarter and 2014 guidance the stock appears to have upside potential selling at $35.57 with a one-year price target1 of $37.38.
1 The price target is derived from Bodie, Kane and Marcus’ intrinsic value formula. The intrinsic value formula discounts the stock’s projected one-year future cash flow by the risk-free rate on the one-year Treasury note and includes adjustments made for specific market assumptions including the stock’s beta and market risk premium.
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Disclosure: No holdings.