Here is How Microsoft Shaped Up in its First-Quarter and it Could Have Been Better

Witawat (Ed) Wijaranakula, Ph.D.
Fri Oct 23, 2015

Shares of Microsoft [NASDAQ:MSFT] surged 10.08% on Friday, after the company announced its first-quarter 2016 fiscal year, ended September 2015, non-GAAP revenues of $21.66 billion, down 12.2% from $23.2 billion the same quarter last year, and non-GAAP earnings of $0.67 per diluted share, compared with $0.65 per diluted share in the first-quarter of its 2015 fiscal year. 

The non-GAAP EPS, which was up 3.08% year-on-year, was based upon 8,066 million shares outstanding, a reduction of 3.41% from 8,351 million shares outstanding during the same period last year. Without the 285 million share reduction, the non-GAAP EPS could have been flat year-over-year. Microsoft said it returned $6.9 billion to shareholders in the form of share repurchases and dividends. Analysts’ expectations were for $0.58 per share on revenues of $21.23 billion.

The quarter appears to be an improvement compared to the last quarter, when Microsoft stunned investors with a massive loss of $2.1 billion due to a $7.6 billion write-down for its Nokia purchase. In the first-quarter 2016 earnings release, Microsoft changed the way they report revenues from its business segments as the Devices and Consumer group is now called “More Personal Computing”. The Cloud business and Business Solutions became “Intelligent Cloud” and “Productivity and Business Processes”, respectively.

The company said that its More Personal Computing revenue declined 17% to $9.4 billion in the first-quarter. Windows OEMs declined 6% despite the Windows 10 launch. Microsoft's smartphone business declined 54% year-over-year. Microsoft didn’t disclose its Xbox revenue in the quarter, but it said Xbox Live monthly active users grew 28% to 39 million. 

Search advertising revenue, excluding traffic acquisition costs, grew 29%. Microsoft said U.S. market share of Bing benefited from Windows 10 usage, but didn’t disclose any figures to back up the claim. Windows 10 is now running on 110 million devices and has 6.63% of the desktop operating systems market, according to NetMarketShare. Windows 7 and XP still have sizable market shares of 56.53% and 12.21%, respectively.

Revenue from Productivity and Business Processes, which includes Microsoft's Dynamics unit, a rival to Salesforce [NYSE:CRM] customer relationship management service (CRM) and enterprise resource planning (ERP), declined 3% to $6.3 billion. Revenue in Intelligent Cloud grew 8% to $5.9 billion. Microsoft said their commercial cloud annualized revenue run rate exceeds $8.2 billion. In the fourth-quarter of its 2015 fiscal year earnings release, Microsoft said its commercial cloud business had an annualized revenue run rate of over $8 billion. 

In its earnings release last quarter, Microsoft highlighted its high-growth businesses, including the Surface tablet with a new Surface Pro 4 launched in early October. In this earnings release, Microsoft didn’t say much about the Surface as its revenue came in at just $236 million. One may have to wait and see how the Surface Pro 4 and Surface Book do during the second-quarter. Meanwhile, Apple [NASDAQ:AAPL] will start shipping the new iPad Pro in November with shipments to be between 2.5-3 million units in the fourth quarter of 2015, according to Digitimes Research. We expect that Microsoft will lose some of their Surface revenue due to competition from the iPad Pro.

From our technical viewpoint, MSFT broke out the symmetrical chart pattern, a trading band between $48.74 and $39.60 a share, with strong momentum. The stock could move higher as it is trying to test the December 2000 trendline resistance level. There is a significant risk of a major pullback as the RSI and MACD are both trading at peak levels. According to the Financial Times, the consensus forecast amongst 29 polled investment analysts covering Microsoft gave the company an Outperform rating with a price target of $55 a share. 

Disclosure: Portfolio holds long position in AAPL. No position in MSFT or any other companies mentioned.

Most Recent Articles  |  Older Articles            

 Infotix Systems, Inc. - NMS (Not Main Street) Research - privacy & security policy
All rights reserved