Update: Microsoft Earnings

Jul.23.14 | About: Microsoft Corporation (MSFT)


Q4 2014 EPS reported of $0.55 per share is down 7% Y/Y.

Q4 earnings have confirmed my earlier opinion of the stock.

Losses at Nokia subtracted 8 cents per share from earnings. Also excluding one-time items, earnings were at $0.66 per share.

Microsoft (NASDAQ:MSFT) reported earnings today that missed expectations by five cents per share. Revenue came in at $23.4 billion, which was $270 million above estimates. The revenue number was an increase of about 17% from Q4 2013.

Highlights from the Microsoft press release include a 147% Y/Y revenue increase in the cloud segment; a 40% Y/Y increase in Bing search revenue; Office 365 added 1 million subscribers and subscribers now total over 5.6 million. Lowlights include a 67.5% gross margin, which was down from 70% in Q3; operating margin of 27.7%, which was down from 32.8% in Q3; guidance on Q1 2015 for $21.2 billion - $22.3 billion in revenue compared to expectations of $23.1 billion.

In my previous article about Microsoft titled, "Microsoft: Worth $37.07 Per Share," two of the metrics that I highlighted as concerns for the company continue to be concerns.

  1. Margins. In this most recent earnings, gross margin and operating margin fell further and continued the trend downward for the last 3+ years.
  2. Valuation. In my previous article, I showed the forward P/E was at a 4-year high. The current trailing P/E now stands at 17. The EPS growth from 2013 to 2014 was a paltry 2%. The average analyst EPS growth estimate for the next five years is 7.7%. That puts the PEG ratio at 2.2.

Microsoft seems to be committed to making the hard moves necessary to regain better growth for the future. The Nokia acquisition was clearly a poor move, but now the company is wasting little time in laying off massive numbers of people to make it leaner. Cloud revenues, while still a small number, are increasing very quickly. Microsoft will be on my radar for the future, but at this point it is pricey to me and I will wait and see how well it executes in the next few quarters.

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