Microsoft reports earnings for the first quarter of its 2011 fiscal year today after market close, and we’ll be covering the release as it breaks after 4PM ET and live blogging the company’s earnings call around 5:30.
The company has suffered a spate of downgrades lately from analysts, most prominently from Goldman’s Sarah Friar. Wall Street is worried about slowing PC sales and the impact of Apple’s iPad, for which Microsoft has no good answer.
Friar also called for the company to spin off its consumer businesses, which CEO Steve Ballmer called the “second most crazy” idea he’d ever heard, and to pay a bigger dividend.
This quarter (which ended Sept. 30) is also the first full quarter to include sales of Office 2010 and some related products released in May. Last quarter, Microsoft gave cautious guidance, suggesting that Business Division revenue (which includes Office and its relatives) will grow more or less in line with PC sales growth. In other words, Microsoft expects businesses to upgrade Office as they upgrade their PCs–not to rush out and buy it to install on their existing PCs. This conservative guidance gives a little room for an upside surprise.
Finally, year to year comparisons are going to be complicated by the fact that Microsoft deferred $1.47 billion of revenue from last year’s Q1 to Q2 to account for a Windows 7 guaranteed upgrade program.
- Q1’11 Revenue: $15.80 billion (up 22% from last year, but up only 10% if you sub out the deferral)
- EPS: $0.55
Here’s a snapshot of expectations from Brent Thill, who covers the company for UBS. He’s relatively bullish.
- Expect FQ1 $15.8B/$0.55, Negative Sentiment Ignoring Enterprise Recovery CQ3 slowdown in consumer PC demand appears to be reflected in estimates and concerns FQ1 is at risk seem overblown. MSFT is overwhelmingly an enterprise-exposed company at ~70% of revenue. We’ve heard consistent commentary around the acceleration of enterprise demand in CQ3, which we expect should benefit FQ1 transactional revs and annuity revenue. Annuity revs (~40% of total) lag the economy and should start to reflect the 2010 recovery. In our view, sentiment is too negative based on LT concerns that ignore near-term improvements in enterprise demand, which is what fuels MSFT’s engine.
- Still Early Stages of Multi-Year Enterprise Refresh UBS survey work suggests MSFT remains the #1 vendor for CIO budget over the next 12 months with the majority of enterprises expecting to move to W7 in 2011. With Office 2010 (the last piece of the puzzle) released in CQ2, MSFT has a multi-year broad enterprise product refresh opportunity. The corporate refresh is in its early stages, but FQ4 bookings growth +27% (strongest in 3 years) and sequential increase in OEM business premium mix is emblematic of early enterprise demand.
- FQ1 Key Items to Gauge Enterprise Demand; FQ1 Revs Build-Up Inside 1) Unearned revs vs. hist. -5.7% q/q (UBS -5.3%), 2) OEM premium mix change.
- Valuation: Earnings Multiple Ignores EPS Growth Profile Trading at 10.8x FY 11E EPS, we believe the Street is underestimating the potential for MSFT to generate 14-15% EPS growth over the next two years. Enterprise demand lifts ASPs and margins and negative revisions to FY 11 OPEX guide and no major M&A (despite a growing cash balance) shows commitment to expense discipline.
Here’s UBS’s expectation for each of Microsoft’s five business segments: