Photo: Associated Press
Press release out! we’re going through it now.First take indicates results beat consensus, but not Wall Street whisper numbers. So an essentially in-line, but not spectacular quarter.
Reported revenue was $14.5 Billion, up 6% over last year. Some revenue related to Microsoft Office 2010 Technology Guarantee program was deferred in the quarter, so if you add that back the revenue figure is $14.8 Billion, at the high end of Wall Street expectations.
Operating income and EPS were slightly ahead of consensus at $5.17 Billion and $0.45, respectively (consensus was $4.8 Billion and $0.42, respectively). However, these numbers were also essentially in-line with Street whisper expectations.
Highlights versus consensus:
- Revenue: $14.5 Billion vs. consensus of $14.4 Billion.
- Operating Income: $5.17 Billion versus consensus of $4.8 Billion.
- EPS: $0.45 vs. consensus of $0.42.
Windows showed strength in the quarter – growing about 28% y-o-y versus consensus estimates of about 23%. The remaining lines were essentially in-line with consensus. This is a positive for Microsoft since Windows (and Office) continues to drive the company.
LISTEN TO THE CONFERENCE CALL HERE
We’ll be taking notes during the call here as well.
Conference Call highlights:
CFO Peter Klein on the line.
3rd consec Q of y-o-y margin expansion. Over 10% of worldwide PCs running Windows 7.
Bing 10 consecutive months of increased market share (OUr Take: yes, but still losing a ton of money).
Bill Koefoed, Investor Relations on the line.
Operating Cash Flow was $7.4 Billion, an all-time high.
Emerging markets up 20%, mature up single-digits.
Beginning of a recovery in IT hardware spend.
PC market grew estimated 25%. Consumers up 30%, business up 14%. netbooks represented 10% of total PC market.
Windows consumer licence growth up 35%.
OEM Rev increased 29%, outpaced PC market.
Server & Tools – shipments strengthened a lot, growing high teens. OEM up high-single-digits.
Annuity revenue roughly flat. Enetrprise services up 5%.
Share of virtualization market grew 300 basis points in the quarter (good for Hyper-V).
Online – Ad rev grew 19%, primarily driven by search. US query share 11.7% for Bing at end of quarter.
Hoping to complete Microhoo by the end of this calendar year in the US (beg of next year globally).
Office 2010 released last week, will generally be available to public in May.
Progress in the cloud offering – Starbucks, Coke, McDonalds all going to the cloud with Microsoft, gaining momentum.
Ent & Devices – 1st party software rev declined due to tough comps. Strong revenue from Xbox Live. Non-gaming rev up 14%.
Headcount decline y-o-y and sequentially.
Yahoo partnership increased G&A costs.
Expect continued strength in hardware shipments. That being said the environment is still “challenging.”
Windows – grow slightly better than the industry
Business – non-annuity revenue should track industry, annuity (40% of biz) should grow mid-dingle-digits.
Online – advertising is improving, should continue into next quarter. Revenue should be in-line with market.
Ent & devices – full-year rev should be roughly flat. This means an uplift in FQ4.
Costs – Making progress keeping overall COGs down. Full-year gross margin should expand 1% versus last year.
Lowering full-year expense guidance slightly.
2011 – Macro, expect business refresh cycle to continue into 2011. Windows and Office will drive overall results. Yahoo will contribute to revenue in 2H of the year.
Office – Expect impact of launch mostly to come in F2011. Tough to talk about ASPs now.
Costs – Product launches are going to increase costs somewhat next quarter.
Corporate upgrade opportunity vs. Consumer: Consumer much bigger in sheer numbers. Get some ASP uplift there. Corporate refresh impact starting this quarter (biz shipments up 14%).
Azure now available in 41 countries.
Here’s the Preview:
The Bottom Line: There have been numerous reports the past couple weeks of strength in the PC market, which should give investors some confidence that the company will meet expectations. Wall Street is looking for Microsoft to modestly beat consensus estimates so the MSFT shares will likely need a blowout to see a material move on the news.
The Street is largely expecting Microsoft to report a strong quarter across its Windows, Servers, and Business Division lines. The company’s Entertainment division (Xbox) will likely be weak given industry sales data and the fact that the Xbox continues to lose share (expectations are low though). Online services (only 4% of overall revenue) will likely look like Google and Yahoo’s results – indicative of a modest recovery in online advertising.
Background: Despite the recent positive industry data (and earnings from tech stocks this week), the MSFT shares have lagged the S&P all year (+1% vs. +8% for the S&P). The underperformance suggests investors are concerned with long-term growth prospects more than they are pleased with the recent strength.
We agree. While earnings will likely meet or beat consensus we think Microsoft is in a difficult spot long-term as PC computing moves increasingly into the cloud, putting the company’s Windows franchise at risk of losing share to aggressive competitors.
Key Consensus Estimates:
- Total Revenue: $14.4 Billion Windows: $4.2 Billion Server & Tools: $3.7 Billion Online Services: $575 Million Business Division: $4.3 Billion Entertainment & Devices: $1.7 Billion
- Windows: $4.2 Billion
- Server & Tools: $3.7 Billion
- Online Services: $575 Million
- Business Division: $4.3 Billion
- Entertainment & Devices: $1.7 Billion
- Operating Income: $4.8 Billion
- EPS: $0.42
- Key Items To Watch Out For: Windows and Office updates, Bing, Mobile.
Here is an excellent snapshot from Citi analyst Walter Pritchard (click here to enlarge):
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