Microsoft Corporation (NASDAQ:MSFT) is expected to report a low double-digit drop in earnings when it publishes its second-quarter financial results after the close of the market on Jan.23, 2014. A live webcast of the earnings conference call will be made available at 2:30 p.m. Pacific Time on the Microsoft Investor Relations website.
Wall Street, according to analysts polled by Thomson Reuters, expects the Windows software maker to earn 68 cents a share, representing a decline of 10.50 percent from last year when it earned 76 cents a share.
Redmond, Washington-based Microsoft's earnings have beat Street view thrice in the past four quarters, with upside surprise of 1.3 to 14.8 percent.
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The consensus estimate has come down from 74 cents over the past 90 days, suggesting analysts are in a bearish mood over the company's earnings prospects for the second quarter as a weak PC market and macro conditions have dampened the Street's optimism. However, two analysts have raised the profit forecast while one analyst has cut the same in the last one month.
After better-than-expected first quarter earnings, the market is hoping for solid results for the October to December period despite a difficult macro environment and a continued decline in the PC environment. The focus would be on Windows 8 adoption, data center and Office 365.
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Quarterly revenue is expected to grow 10.4 percent to $23.68 billion from $21.46 billion in the same quarter last year.
Worldwide PC shipments totaled 82.6 million units in the fourth quarter of 2013, a 6.9 percent decline from the fourth quarter of 2012, according to preliminary results by Gartner,. This is the seventh consecutive quarter of shipment decline.
However, Mikako Kitagawa, principal analyst at Gartner, believes that though PC shipments continued to decline in the worldwide market in the fourth quarter, markets, such as the U.S., have bottomed out as the adjustment to the installed base slows.
Strong growth in tablets continued to negatively impact PC growth in emerging markets. In emerging markets, the first connected device for consumers is most likely a smartphone, and their first computing device is a tablet. As a result, the adoption of PCs in emerging markets will be slower as consumers skip PCs for tablets.
Consumers shifting from PCs to tablets for daily content consumption continued to decrease the installed base of PCs both in mature as well as in emerging markets. Greater availability of inexpensive Android tablets attracted first-time consumers in emerging markets, and as supplementary devices in mature markets.
Investors will look for further updates on the recent Nokia deal and ramping of Surface 2, Surface Pro 2 tablets. The market would also be focusing on the uptake of Windows 8.1, an update to its popular Windows 8 operating system, and newly launched Lumia 1520.
Since PC market remains weak, Microsoft has to gain ground in enterprise software. The company is looking to leverage the cloud and its own brand devices to stay afloat in the highly competitive enterprise market.
If Microsoft manages to get top firms to use its cloud software, it would lock them into its ecosystem. Investors would be looking at the company's cloud strategy and how it is faring.
In December, Microsoft introduced the Cloud OS Network, a worldwide consortium of more than 25 cloud service providers delivering services built on the Microsoft Cloud Platform: Windows Server with Hyper-V, System Center and the Windows Azure Pack.
Enterprise as a percent of revenues was 55 percent in fiscal 2013 up from 36 percent in fiscal 2010. The improved contribution from enterprise drives improved financial visibility but also greater long-term revenues and profit potential given higher margin cloud business.
In addition, the shift to cloud services promises to lessen Microsoft's decades-long piracy dilemma and monetize emerging markets like China which is now the company's fastest growth market at $1 billion plus revenues. Investors will want some color on the company's investment strategy towards the key emerging markets.
Meanwhile, Microsoft may record lower gross margins in the near to intermediate term due to higher CAPEX and the multi-year transition towards devices and cloud services. But, investors should look through this transition to the benefits that will accrue as a leading enterprise cloud IT provider from a larger total available market.
In addition, the entertainment division's revenue would also be closely watched and any updates on the next generation console, Xbox One. Microsoft sold more than 3 million units of Xbox One.
The Street would be hoping for any announcement on the CEO succession as Steve Ballmer would retire within the next 12 months. The latest in the candidates list is Ericcson (NASDAQ:ERIC) CEO Hans Vestberg while others include Stephen Elop and Satya Nadella. Microsoft, which has had only two Chief Executives in its 38-year history, is expected to announce its third CEO in the early part of 2014.
For the first quarter, the world's largest software company reported net income of $5.24 billion or 62 cents a share, compared to $4.47 billion or 53 cents a share for the year-ago quarter. Excluding $113 million in revenue deferred mainly related to pre-sales of Windows 8.1, Microsoft would have earned 63 cents a share. Quarterly revenue rose 16 percent to $18.53 billion. Excluding deferral, first quarter adjusted revenue grew 7 percent.
Shares of Microsoft have gained 8 percent since reporting its first quarter earnings, and increased 34 percent in the last one year. The stock, which has a market cap of more than $303 billion, traded between $27 and $38.98 during the past 52-weeks. The stock trades 12.6 times its forward earnings.
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