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Summary

  • Although the PC market is in bad shape, Microsoft’s performance this year has been solid.
  • PC sales are expected to decline at a slower rate this year, giving Microsoft a boost, while the end of support for XP should lead to better license sales.
  • Strong console sales should result in better performance from Microsoft going forward.
  • Microsoft’s enterprise business is also growing fast.

Shares of Microsoft (NASDAQ:MSFT) are trading close to their 52-week highs. The company has seen good times in 2014 despite the recent sell-off in tech stocks, gaining more than 7% so far. Now, Microsoft's third quarter earnings report is up for release on April 24. So, will Microsoft be able to satisfy estimates and issue a strong outlook? Let's find out.

A look at the estimates

According to analysts, Microsoft should post revenue of $20.39 billion for the third quarter, slightly below its last year's top line. In addition, the company's earnings are expected to decline from $0.72 a share last year to $0.63 this time. As Microsoft is seeing a decline in the consumer PC business, this drop doesn't come as a big surprise. However, Microsoft should be able to meet the analysts' forecast since the estimates are now in line with the company's own expectations.

Moreover, since the company had reduced its capital expenditure forecast for the current year, its earnings should also be in line with estimates.

At first look, it seems that Microsoft is fighting a losing battle as sales of personal computers are declining. However, the company is making some good moves to get better going forward. Let's take a look.

Why the future looks better

As mentioned earlier, Microsoft is suffering as PC sales are declining. However, there could be some respite in store for the company. According to IDC, PC shipments will drop 6% in 2014 from the year before to approximately 296 million. However, this is better than the 10% decline that was seen in 2013. So, Microsoft can expect better sales numbers of its Windows software this time.

In addition, Microsoft has stopped providing support for Windows XP. This could lead to a bump in adoption of Windows 8 and Windows 8.1 devices. Sales of Windows 8 haven't been very bad and the operating system lags sales of Windows 7 just marginally. According to Forbes -

According to Microsoft, Windows 8 just recently crossed the 200 million license mark. This seems a little anemic compared with its predecessor-Windows 7 - which had sold about 240 million licenses in roughly the same amount of time. However, sales of the Windows OS are typically closely tied to PC sales in general, so it helps to view Windows sales as a function of PC sales in order to get a fair comparison.

The 200 million Windows 8 licenses compare against a slower PC market with only 314 million sold, so it works out to 63 Windows 8 licenses per hundred PCs sold. That makes Windows 8 sales a 34 percent increase over Windows Vista, and about 15 percent higher than Windows XP. It also puts Windows 8 only about 7 percent behind Windows 7.

Hence, a slower decline in sales of PCs and the end of support for Windows XP should help Microsoft sell more of its latest Windows software.

In addition, sales of Microsoft's Surface 2 tablet are getting stronger. In the second quarter, Surface revenue doubled on a quarter-over-quarter basis, which indicates that users are adopting the tablet more and more.

Gaming success

The successful launch of Xbox One in 13 markets with 3.9 million unit sales in just over five weeks highlights Microsoft's significant progress in the consumer space.

Xbox One was the leading console in the U.S. for the month of December, which was its first full month in market. Then the launch of Xbox helped Microsoft capture 46% share of the U.S. console market in December, according to management. Microsoft is excited by this enthusiastic response from its loyal customers, and is working to increase sales of the Xbox One.

The company made a smart move by launching its Microsoft-exclusive gaming title, Titanfall. This was the top selling game in the U.S. in March. According to NPD -

Titanfall was the top-selling game for March 2014, with a solid attach rate to the Xbox One. After one month of sales, it is currently the second-highest selling game for the Xbox One.

Microsoft bundled this game with the Xbox One and sold it at the same price, thereby increasing adoption of the console. As the console cycle matures, Microsoft should continue gaining ground in the gaming segment.

Enterprise still strong

Microsoft is seeing strength in the business segment. It is witnessing growth in the business PC market driven by an improving macro environment, better availability of innovative new hardware and a refresh cycle ahead of Windows XP end of support.

Moreover, the fact that Windows is the platform of choice for business customers is helping Microsoft. Windows Pro revenue grew 12% in the last quarter and outpaced the underlying business PC market, driven by faster growth in both enterprises and developed markets, where Pro attach rates are higher. Bookings in the commercial business were up 12% and renewal rates remained in line across Microsoft's product portfolio.

Moreover, the release of SQL Server 2014 for big data is another important development. SQL Server is driving significant in-memory performance gains, offering a complete business intelligence solution for big data. Additionally, it enables hybrid cloud solutions with cloud backup and disaster recovery as well as providing enhanced availability and security.

Hybrid infrastructure and management offerings are top priority with Windows Server, Azure and Systems Center at the center of hybrid cloud strategy, and together they enable portability and scalability of workloads. Customers get high scale virtualization, built-in software defined networking and hybrid business continuity that enables their modern data centers by using this product suite.

Conclusion

Microsoft is making some solid moves to mitigate the falling sales of consumer PCs. The company's diversified business and stabilization of the PC market should help it deliver a better performance going forward. As such, Microsoft looks primed for further gains and I expect the company to come out with a better-than-expected outlook when it reports results.

Source: Earnings Preview: Microsoft