Microsoft (MSFT) announced its earnings for Q1 FY13, posting relatively disappointing results. Revenues declined to $16 billion during the quarter, down from the $17.3 billion the company posted last year. Operating income also fell by approximately $2 billion to $5.3 billion in Q1 FY13.
We expected the company’s growth rate to slow during the quarter but did not think the impact of a slowdown in PC sales would affect the top-line so heavily. However, it seems that the market expected these dismal results as the company’s stock only fell around 2% after hours. In our opinion, the next few quarters are extremely important for Microsoft as its new operating system, Windows 8, is set to release next week, and Office 15, its new productivity suite, is rumored to release early next year. Below, we’ve included an analysis of Microsoft’s Q1 FY13 results by segment:
During the fourth quarter, Microsoft’s revenues from its Windows division decreased drastically to $3.2 billion relative to $4.8 billion it posted in Q1 FY12. The large decline in revenues was driven by the deferral of $783 million worth of revenues due to Windows 8 pre-orders. If these revenues were included, the top-line would still have contracted but only to approximately $4 billion.
As mentioned above, we expected revenue declines in this division because of the drastic fall in year-over-year PC shipments. We aren’t too concerned by this quarterly slowdown in revenues because we think that potential customers deferred PC purchases due to the pending release of Windows 8. Therefore, we think that the lull in Widows OS sales will be temporary, and we are forecasting a slight increase for Windows’ market share due to the Windows 8 release.
The company’s primary cash cow, the Office productivity suite, also posted a decline in revenues of 2% year-over-year. The decline in this segment was driven by $275 million worth of unearned revenue and a decline in the overall PC market. The bright spot for this division was Microsoft’s business revenue, which increased 3% year-over-year due to growth in multi-year licensing agreements.
We are a bit surprised by the decrease in Office revenues but should have seen this coming due to the low PC sales during the quarter. Overall, like the decline in Windows revenues, we think that this contraction will be temporary because PC sales should gain after the release of Windows 8 next week.
Server & Tools
Microsoft’s server and Tools division was the shining light for the company as it posted an increase in revenues of 8% and an increase in operating income of 12%. Revenue growth was driven by an increase in enterprise service revenues and product sales. We’re encouraged by the continual growth that this division posts, as it becomes another major driver of Microsoft’s value. In our opinion, the division seems set to become another cash cow for Microsoft in the coming years.
Online Services Division (OSD)
The Online Services Division continued to negatively impact Microsoft’s overall profitability, posting an operating loss of $364 million. However, this division did report some encouraging signs as online advertising revenue grew 15% due to an increase in search revenues as Bing grew its organic US search market share to 16% during the quarter. We forecast Bing’s global market share to increase steadily throughout our forecast period but any surprises to the upside are not expected to increase the company’s value substantially. You can determine the impact of Bing’s market share on Microsoft stock price by using our tool below.
Entertainment and Devices Division
The division posted a decline in revenue of 1%, mostly due to lower Xbox 360 sales. This was more or less in line with our expectations since we think that Xbox sales will decline until the new version of the Xbox is released, probably in 2013. A bit of a surprise though was the fact that the division’s operating income declined a staggering 94%, primarily because of an increase in R&D costs and the payments made to Nokia for their usage of the Windows Phone OS.
We currently have a $41 price estimate for Microsoft, which is approximately 40% above its current market price.
Disclosure: No position