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A Preview of the Microsoft Earnings Report
Posted by: Black Iguana (IP Logged)
Date: October 25, 2013 10:16AM

With Microsoft (MSFT) set to release its earnings for first fiscal 2014 quarters, there have been a lot speculations and estimations regarding the performance of the tech giant. In fact, the analyst consensus has been estimated at $0.54 (versus $0.53 last year) on $17.789 billion in revenues for expected year-to-year growth of around 2% and 11%, respectively.

As the company releases its earnings report, the investors must pay special attention to the “consumer office” revenue growth. It must be noted that Microsoft is in the process of converting into its subscription-driving model from a license–based model. This is because of the fact that the annual payment that the subscribers pay is quite less than the one-time license fee that the consumers pay. This, however, might become fruitful in the long run.

Another thing worth noting is whether office manages to maintain its popularity among its users. The development of applications on android powered tablets/smartphones has consumed a huge market share. This has thus reduced entrance barriers for software on PCs. This declining market share might even affect office’s commercial usage. Keeping all this in mind, the investors must make a move.

What’s Happening in Microsoft?

Given the decreasing market share, the company had taken measures to stop bleeding. These actions include retiring the current CEO Steve Ballmer searching for a new one, acquiring Nokia’s device business and folding it into MSFT’s new devices and consumer segment. This new unit is now headed by Stephen Flop who is inline to become the next CEO. Bill Gates’ philanthropic ways have been criticized by the company. It is also being said that he might be asked to give up his Board position as he is selling more and more of his stock and reducing his equity.

The positive for MSFT is the $77 billion in cash on the balance sheet and the $6 billion in free-cash-flow that MSFT generates every quarter. The flip side to this cash position might be the fact that if 75% to 80% of the cash is custodied overseas and is not available for accelerated share repurchase the shareholder value could be seriously hampered. After the involvement of ValueAct with the stock and taking around 1% position, MSFT has traded up from $27 to $33.

An Estimate of Office Revenue for Q1

In order to estimate growth related to office it is important to first sort out windows revenue from the segment. This is made easy as it is expected the windows is going to lag market by 5% in the past quarter experts expect year-over-year growth of around -13% so as long as the revenue is set for an increase. sales instead of revenue related to Office 365. On an average the expected license

The growth rate of consumer office’s revenue is mainly caused by increased license revenue on a quarterly basis is around $666 million with subscription revenue of $87.5 million again on a quarterly basis.

Thus, this is not at all a bad scenario for the long term earnings of “office consumer” but it could impact “office commercial” because the big organizations might also go for alternatives instead off office if their employees aren’t using it in the personal lives.

All in all, the earnings generated by “office consumer” will have a relatively small impact on MSFT’s EPS for the current quarter and is likely to be significant in the long-term. Investors must therefore play their cards watchfully as the true picture can only be revealed once Microsoft is out with its earnings report for the current quarter.

Stocks Discussed: MSFT,
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