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Microsoft: Q1 Results Seen as Lackluster, Windows 8 Eyed

 October 17, 2012 11:50 AM


(By Mani) Microsoft Corp. (NASDAQ: MSFT) is expected to report lower earnings and revenues when it announces its first quarter results on Oct.18, hurt by weak demand for PCs. However, the bigger catalyst would be the availability of Windows 8 on Oct. 26.

Wall Street expects the software giant to earn 56 cents a share, according to analysts polled by Thomson Reuters. The consensus estimate implies a decrease of 17 percent from 68 cents a share in the same quarter last year. However, Microsoft's earnings have beat the Street view in the preceding three quarters.

During the past three months, consensus estimates have dropped from 67 cents to the current estimate of 56 cents, implying that consensus has been moving lower as the earnings approaches, due primarily to the soft trends in the PC market.

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Meanwhile, the Street expects Microsoft's quarterly revenue to drop 5.5 percent to $16.42 billion from $17.37 billion. This would be the first year-over-year revenue drop for Microsoft in the past several quarters.

"The larger issue has been continued soft trends in the PC market, which ultimately could lead to lowered estimates. However, we think the soft end market and potential for lowered numbers should both be widely known by investors at this point," RBC Capital Markets analyst Robert Breza wrote in a note to clients.

Among the key developments in the quarter, Microsoft raised its quarterly dividend by 15 percent to 23 cents per share. Despite soft PC trends, Microsoft has an unassailable lead in its MS Office software business, boosting its cash position. As at the end of June 30, 2012, Microsoft had total cash, cash equivalents, and short-term investments of $63.04 billion.

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Microsoft also announced the general availability of Windows Server 2012. The company said that Windows Server 2012 powers the Cloud OS. The company said it built Windows Server 2012 from the cloud up, applying its experience operating global data centers that rely on hundreds of thousands of servers to deliver more than 200 cloud services.

In the fourth quarter, Microsoft reported a $492 million loss on a goodwill impairment charge tied to the 2007 acquisition of aQuantive Inc. Excluding items, it earned 73 cents a share, which came in above the Street view of 62 cents a share. Revenue rose 4 percent to $18.06 billion. Microsoft reaffirmed its fiscal year 2013 operating expense guidance of $30.3 billion to $30.9 billion.

Fourth quarter revenue from the company's Windows and Windows Live division fell 13 percent to $4.62 billion. There should be continued strength from the enterprise side, while consumers may hold back ahead of the Windows 8 launch.

Investors will be looking for how the Windows division performed amid the weak PC market and commentary over the future performance of the division, which has posted continuous quarterly revenue declines.

Server and tools division's revenue rose 13 percent to $5.09 billion in the fourth quarter, the ninth consecutive quarter of double-digit revenue growth, mainly driven by 22 percent growth in multi-year licensing revenue. Entertainment and devices division advanced 20 percent to $1.78 billion.

Microsoft said it shipped 1.1 million Xbox 360 consoles during the fourth quarter, down from 1.7 million during the same period last year. However, Xbox 360 maintained its market share leadership position in the U.S.

Redmond, Washington-based Microsoft, whose Windows operating system runs almost 90 percent of PCs, took another step in the right direction with the latest Office suite as the software giant continues to adapt to the post-PC world.

It launched a new Office Upgrade Offer. Under terms of the offer, customers that purchase Office 2010 or Office 2010 for Mac 2011 will qualify for a free download of Office 365 Home Premium, or the equivalent Office 2013 offering. Under terms of the offer, the company expects to defer an estimated $100 million to $140 million of revenue from the first quarter of fiscal 2013.

The second quarter will have lots of moving parts with the introduction of Windows 8, Surface and Halo 4 likely the most visible and the recipients of a big marketing push into the holiday selling season.

"These drivers will be weighed against the continued soft PC environment. We think the launch would need to well exceed expectations to move numbers higher over the next several quarters," Breza noted.

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