Thursday, June 7, 2012

Microsoft: FYQ2 Aside, It’s All About Windows 8

Shares of Microsoft (MSFT) are up $1.54, or 5.5%, at $29.66 after the company last night met fiscal Q2 revenue expectations and beat by a couple of pennies on the bottom line.

The most mysterious element of the report was the 6% drop in Windows division sales. Microsoft had warned of weakness in PCs last week, and last night it said the collapse of netbooks was a particular difficulty. But as Microsoft’s IR director told me after the release, netbooks alone don’t explain the drop in Windows revenue. In fact, it wasn’t completely clear what drove it, he said.

About the only other tidbit that could be gleaned yesterday was when CFO Peter Klein was asked by an analyst on last night’s conference call what had led to a slowing of the rate of growth in business PC revenue for Windows. Klein remarked that “a small amount due to macro,” meaning macroeconomic concerns.

However, most analysts seem to be able to get past that fact today. The real issue is whether to hold onto the stock in anticipation of the arrival of Windows 8, later this year, or bail until Windows 8 comes:

Kevin Buttigieg, Collins Stewart: Reiterates a Buy rating and a $33 price target, writing that Microsoft has “cleared the confusion,” putting to rest “fears of wider issues” for the company than just PCs. Buttigieg thinks the focus will now be on forthcoming products (Windows 8, for example) and that the stock’s multiple can expand. The drop in Windows division revenue of 6% was worse than the 4% he had been modeling, but he notes that it was made up for by the Business Division and the Entertainment & Devices group (Xbox). Buttigieg cut his revenue estimate for this year to $73.61 billion, from a prior $74.33 billion, but keeps his EPS estimate at $2.65.

Walter Pritchard, Citigroup: Reiterats a Buy rating and a $35 price target, writing that the company’s strength in its enterprise business, with the company’s “contracted backlog” higher than is the norm for the season. In short, the “diversity” of Microsoft’s business model is playing to Microsoft’s advantage amidst the uncertain PC market. Pritchard cut his estimates for this year to reflect an even more pessimistic view of the personal computer landscape. He now models Microsoft making $74 billion in revenue and $2.69 per share in profit versus his prior estimate for $74.85 billion and $2.78 per share.

Brendan Barnicle, Pacific Crest: Reiterates a Sector Perform rating on Microsoft (MSFT), writing that he is “waiting for Windows 8 and Windows recovery,” with PC headwinds likely to keep that business from recovering until the March quarter. “Microsoft�s Windows revenue declined by 6% in fiscal Q2 (Dec), which was much slower than IDC�s estimate of a Q4 PC decline of 0.2% and Gartner�s estimate of a Q4 PC decline of 1.5%. Windows revenue even grew slower than Microsoft�s own estimate of a Q4 PC decline of 3%.”

Heather Bellini, Goldman Sachs: Reiterates a Neutral rating on the stock, while cutting her estimates for this quarter to $16.8 billion in revenue and 55 cents EPS from a prior $17.4 billion and 59 cents. She also cut her the full year estimate to $74 billion and $2.68 per share from a prior $74.3 billion and $2.70. “We see December quarter results as helping to support the stock near term, with the continued big question mark relating to the company�s consumer price and quality competitiveness in new form factors at the launch of Windows 8. As such, we continue to see the stock relatively ??????range bound near term.”

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