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Microsoft Corporation (NASDAQ:MSFT) - Q2 2011 Earnings Preview

 January 20, 2011 03:42 PM

Microsoft Corporation (MSFT) is scheduled to report its second quarter earnings on January 27, 2011. In the last four quarters ended September 2010, Microsoft's reported EPS exceeded analysts' consensus estimates by margins in the range of 7.14% and 25.42%.

Microsoft is the world's largest software maker, primarily as a result of its near-monopoly position in desktop operating systems and its Office productivity suite. The combination of these two strongholds poses a formidable barrier to entry for competitors. MSFT has used the strong cash flows from these businesses to fund research and development of other markets, including home entertainment consoles and Internet online advertising. Revenue sources in fiscal 2010: Microsoft Business, 29.8% of total; Windows & Windows Live, 29.6%; Server and Tools, 23.8%; Entertainment & Devices, 12.9%; Online Services, 3.5%; Other, 0.4%. Research and development: 13.9% of 2010 sales.

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Growth in enterprise spending boosted Q1 results

Microsoft's first-quarter net income jumped 51%, helped by solid enterprise growth and continued strong consumer demand for Office 2010, Windows 7, and Xbox 360 consoles and games. Net income rose to $5.4 billion, or 62 cents a share, from $3.6 billion, or 40 cents a share, in the year-ago quarter. Revenue climbed 25% to $16.2 billion from $12.92 billion in the same quarter last year. However, excluding the impact of deferred revenues related to the Windows 7 launch, revenues increased 13%. Slower growth in PC sales to consumers was more than offset by stronger enterprise spending.

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Q2 EPS likely to show y-o-y decline despite revenue growth

For the second quarter ended December, 2010, analysts' EPS estimates range from a low of $0.63 to a high of $0.73, compared to the consensus estimate of $0.68 or $0.74 in the year ago quarter. Analysts' revenue estimates for the second quarter range from a low of $18.52 billion to a high of $19.74 billion, compared to a consensus estimate of $19.14 billion or $19.02 billion in the same quarter a year ago. For the quarter ended December, 2010, the consensus EPS forecast has remained the same over the past week at $0.680 and remained the same over the past month at $0.680. Of the 4 analysts making quarterly forecasts, 3 raised and 1 lowered their forecast.

Upward revision in analysts' forecasts is, I think, attributable to, 1) likely acceleration in PC sales to consumers; 2) increasing interest in its overall Office productivity platform, which includes SharePoint, Exchange, Dynamics CRM, etc.;  and 3) sustainable stronger enterprise spending.

Historical 12 month results, financial position

Since 1994, the company's revenue per share continued to grow y-o-y from $0.5 to $6.6 in 2008. Though revenue per share fell to $6.56 in 2009, nevertheless it rebounded to $7.21 in 2010. During the same period, the company's cash flow per share and earnings per share continued to increase with one dip in 2009.

I consider MSFT's financial position strong. Until 2008, the company was a zero long term debt leveraged company. Though, long term debt increasing, since then, as the company's cash of $36,788 million at end FY2010 was significantly more than its long term debt of $4,939 million.

Annual EPS growth acceptable

MSFT's annual EPS for the last 5 years (from earliest to the most recent fiscal year) were $1.2, $1.42, $1.87, $1.62, $2.10. The one dip is considered acceptable, as earnings quickly rebounded after the decline. Though, MSFT's profit margin has been decreasing over the past three years (Current year: 30%, Last year: 24.9%, Two years ago: 29.3%), it is still competitive on a relative basis.

Recent developments

Towards the end of October 2010, MSFT signed a definitive agreement to have its products, technology, intellectual property, customer contracts, and other resources acquired by the Microsoft Corporation. Canesta is the inventor of a single chip 3-D sensing technology platform and a large body of intellectual property. No details of the agreement were disclosed.

12 month target price established at $34 In the last 52 weeks, the company's stock has been trading in the range of $22.73 to $31.58. In the last one year, the company's stock has lost $2.31 or 7.57% and closed at $28.25 on January 19, 2011. I forecast 2011's EPS at $2.48 and 2012's at $2.72. Over the next five years, I expect this company's earnings to grow at an average annual rate of 11.7%. So, I set 12 month target price at $34.



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