THE MICROSOFT INVESTOR: Video Game Sales Up In March, But XBox Down Again

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MSFT shares flat after a week of gains
MSFT shares have been up all week on strong industry data news and so far today are taking a bit of a breather.  Upcoming potential catalysts include March quarter results (Windows 7).  Over the long haul, we think Microsoft is in a challenging spot, as the world moves away from PC-based computing toward cloud and mobile computing.  MSFT currently trades at 13x Enterprise Value / Trailing Twelve Months Free Cash Flow.

Video Game Industry Sales Up; But Console Sales Continue To Slip (
Video game industry sales rebounded in March, increasing 6%.  The gains were driven by releases of Final Fantasy XIII from Square Enix,  Battlefield: Bad Company 2 from Electronic Arts, God of War III from Sony, and Pokémon SoulSilver and HeartGold from Nintendo.  The strong titles helped drive 10% increases from software and accessories.  However, hardware sales declined again in March, down 4%.  Gamers are increasingly moving online so this trend will likely continue.  Bad news for Microsoft’s Xbox.

JP Morgan Ups Its Microsoft Estimates Based On PC Market Data (JP Morgan)
More estimate increases following the IDC and Gartner data: “We expect Microsoft to exceed attainable current March quarter consensus estimates of $14.37 billion and $0.42, respectively, and we are increasing our estimates based on recent PC data from Gartner…Current top-line  expectations appear to anticipate a worse-than-normal seasonal decline of 13.9% for the March quarter relative to the average decline of 9.3% Microsoft experienced during the more normalized 2003-2008 period.  This is despite the improving PC sales environment and modestly improving economic environment overall…We are raising our Windows and MBD division revenue and overall EPS estimates for the March and June quarters and fiscal 2011 reflecting Gartner’s preliminary PC unit shipments for the March quarter and Gartner’s latest PC unit forecasts for the remainder of fiscal 2010 and 2011.”

UBS Surveyed CIOs And They See IT Spend Increasing This Year, Too (Reuters) 
If the big research firm forecasts didn’t convince you, then UBS brings it to you straight from the horse’s mouth: CIOs across the world see IT spending up this year.  UBS surveyed 100 companies, of which 60 were located in the United States, 14 in the UK, 13 in France and 13 in Germany and found that most expected IT spending to increase modestly this year.  Specifically, CIOs surveyed expect a 0.5% increase this year, up significantly from a 5.1% decline during 2009.  “Microsoft, Oracle and VMware were primed to get a bigger cut of the CIO wallet in 2010…Some 46 per cent of vendors expected to spend more with Microsoft over the next 12 months, helped by increasing interest in the Windows 7 operating system.” 

More Windows Azure Features Makes It Easier For Developers To Work With The Platform (ZDNet)
Microsoft needs to come up with a cloud strategy to fend off competitors like Google and every little bit counts.  “While Windows Azure is designed first and foremost to appeal to .Net developers, Microsoft has been adding tools for those who want to work on cloud apps using PHP, Ruby and even — gasp — Java…Microsoft is working with Persistent Systems Ltd. on delivering this summer new updates to its Java, Ruby and PHP software-development toolkits for Azure, said Vijay Rajagopalan, Principal Architect in the Microsoft Interoperability team.”  This should help make the cloud platform accessible to a wider audience.  Though, it’s going to take a lot more than that to stop Google in it’s growing enterprise efforts.

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