Microsoft (MSFT) announced its 1st quarter earnings today and missed analyst estimates. The stock is down 2% after earnings were announced. We believe the miss is a combined factor of Windows 8 anticipation and a global economic slowdown. The company announced that it has certified more than 1,000 Windows 8 devices thus far. This is a very bullish signal for success of the new OS. Therefore Microsoft's high dividend yield, low valuations and a positive anticipation of Windows 8 makes us bullish on the stock.
The market was expecting revenues of $16.37 billion for the 1st quarter of 2013. The consensus EPS expectations from the software giant were $0.56. The company reported 1st quarter results yesterday after market, announcing earnings of $0.53 per share and revenues of $16 billion, missing revenues estimates by 2.2% and earnings by 5.4%. According to the company disclosures the earnings reflect $1.36 billion in deferred revenue ($0.13 EPS) due to the Windows upgrade offer and unearned sales of Windows 8 to OEMs.
The only segments to exceed consensus estimates were Entertainment and Devices and Online Services. As compared to consensus estimates of $3.5 billion, the company reported revenues of $3.2 billion from Windows and Windows Live segment. On a YoY basis the segment showed a significant decline of 34%. The Servers and Tools segment showed a 7% growth as compared to the same period last year. This growth is a very encouraging sign amid a general economic/business slowdown. The performance of Services and Devices Segment was approximately flat YoY. However the Xbox has shown a significant market share growth in the last year and according to company disclosures enjoys the highest North American market share (49% market share). The revenues from Multiyear licenses grew by double digits.
Microsoft missed a trick previously by not focusing strongly enough on its Windows Mobile OS. This mistake has allowed Google (GOOG) to dominate the smartphone industry with Android. The launch of Microsoft Windows 8 might be the most crucial event for MSFT in the last decade. The world is shifting to touch screen systems and if Microsoft fails to attract customers to Windows 8, Windows OEMs will be forced to adopt Android. This will have a very negative impact on the Microsoft Ecosystem. The company is launching Windows 8 and WP8 next week i.e. 26th October. Consumers are holding off purchases till the launch which is the main reason why there has been a decline in Windows Segment revenues.
We believe that valuations of Microsoft are now tied to Windows 8 and WP8. This launch would be different than earlier launches because this time around Microsoft is just not upgrading an OS; rather it is providing customers with something totally different and new. The reaction of the consumer to this change will determine the future course for the software giant. The company has missed consensus estimates and that is why the stock is down 2%. MSFT is currently trading at a Forward P/E of 9x (Nasdaq's P/E is 15x) and offers a dividend yield of 3.1%. We are bullish on prospects of Windows 8 and WP8 and believe the stock is a value buy. The company also offers an above average dividend yield as well which further strengthens our buy rating.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.