Microsoft earnings - Q4 2014

posted by Alex Cho | published by Amigobulls on
  • Microsoft beats on earnings and revenues excluding the impact from Nokia.
  • It will take a full year for Microsoft to break-even on Nokia.
  • The company's EPS for Q1 2015 will be $.64 based on a break-down of costs using guidance.
  • Microsoft could beat on earnings in the next quarter if management is able to keep costs within tight control.
  • Satya Nadella communicates that a united ecosystem will keep Windows relevant to application developers.

Microsoft earnings review Q4 2014

Microsoft (NASDAQ:MSFT) reported EPS of $.55 per share, which is below the consensus earnings estimates of $.65. The miss on earnings came from the Nokia acquisition. Excluding the impact from the Nokia acquisition, EPS for the quarter was $.66. Microsoft beat earnings by a single cent.

The stock rallied by 1.29% in afterhours trading. Most of the optimism came from the guidance figures for the separate segments paired with break-even of the Nokia division, which will come as result of strict cost controls paired with some sales growth.

Microsoft Q4 2014 earnings

Microsoft Q4 2014 financial metrics

Source: Microsoft

The 18% year-over-year revenue growth came as a result of the Nokia acquisition. Excluding Nokia, Microsoft grew revenue by 10% YoY. The decline in earnings came as a result of the Nokia acquisition. Excluding the impact of Nokia, Microsoft earnings growth came in at 12% YoY.

Some segments in Microsoft are rapidly growing, while other businesses are more cyclical in nature. Some key areas where Microsoft reported notable results follow:

  • Windows OEM Pro revenue grew 11% year-over-year
  • Computing & gaming hardware grew 23% year-over-year
  • Bing & Office 365 consumer on a consolidated basis grew 20% year-over-year
  • Commercial Cloud services grew 147% year-over-year

Microsoft has a steady revenue growth as well as solid profit growth. Going forward, this is likely to continue being the case.

Based on the guidance that was offered by Microsoft, I was able to break down future financial performance for the next fiscal quarter.

Microsoft Earnings: Q1 2015 breakdown

In millions USD (unless otherwise noted)
Revenue 24,400
Cost of revenue 7,900
Gross profit 16,500
Operating expenses 8,700
Restructuring charges 950
Operating income 6,850
Taxes 1,567
Net income 5,275
EPS estimate for FY Q1 2015 (in $ only) 0.64
Shares outstanding 8260

Source: AlexLeAnders

I anticipate revenue to come in at around $24.4 billion. My sales estimates are at the higher end of the range, because of favorable macro headwinds paired with seasonal refresh for PC and servers. Furthermore, high growth categories like gaming, search, cloud, and office 365 are likely to sustain high growth rates.

I estimate that expenses will be at the upper end of the range (higher cost will reduce profitability). Microsoft usually has great cost controls, and I don’t expect costs to deviate too much from the guidance range. However, a sudden ramp up in sales may be followed by an increase in head count in certain areas, and a higher production run for certain product categories may lead to higher cost of revenue than what Microsoft estimates. After all higher unit volume should result in higher input cost.

I estimate that EPS for FY Q1’ 2015 will be $0.64. The analyst consensus estimate for the upcoming quarter is exactly $0.64. I think Microsoft may be able to deliver higher EPS if they can reduce the restructuring charge by a couple hundred million, and if the tax rate comes in below 23%. So again, a beat is possible. It would require tight cost management. I think that if cost synergies between Microsoft and Nokia were to materialize well ahead of schedule that could be another way Microsoft ultimately beats on earnings.

Given the fact Microsoft trades at a 17 pe multiple paired with a 2.5% dividend yield, I believe that it’s a reasonable play on server, cloud, consumer electronics, PC, and even gaming. I think Microsoft offers pretty broad diversification, paired with reasonable growth rates that can appeal to more income oriented investors. Furthermore, I expect great things from Microsoft’s ecosystem, which was explained in more detail over the course of the earnings conference call.

Satya Nadella made some interesting comments about a universal Windows:

Yes. One of beauties of universal Windows app is, it aggregates for the first time for us all of our Windows volume. The fact that even what is an app that runs with a mouse and keyboard on the desktop can be in the store and you can have the same app run in the touch-first on a mobile-first way gives developers the entire volume of Windows which is 300 plus million units as opposed to just our 4% share of mobile in the U.S. or 10% in some country.

By doing this Satya Nadella believes that App developers can actually earn a profit by selling applications on the Windows store. He mentions that they have great developer tools (software developer kits), that will help application developers to more easily create application for the entire Windows ecosystem, which will be inclusive of desktop, mobile, and Xbox. This goes back to the notion of One Microsoft, and assuming the strategy works, the Windows ecosystem will retain application developers despite having a limited amount of smartphone market share.

In fact, some unique synergies may emerge, and that’s why I wouldn’t count Microsoft out yet. I think they’re still an innovative company.

Conclusion

Microsoft beat earnings in the most recent quarter by a sliver of a margin. Microsoft communicates that it is set to break-even from its handset division by fiscal year 2016. Over the next four quarters margins may be lower than Microsoft’s historical profitability as a result of the Nokia acquisition.

I think EPS will be in line with consensus EPS estimates of $.64 in the upcoming quarter. I think cost controls may be a bit more difficult for the duration of the fiscal year. A beat may happen, but it will require a great deal of efficiency.

Disclaimer: The views expressed in the article are of individual authors and are not necessarily supported by Amigobulls. We do not hold any stake in the aforesaid stocks. Please read our detailed disclaimer.

About the author

Alex Cho
Alex Cho is a guest contributor at Amigobulls. He specializes in equity analysis, and writes opinion for some of the worlds most prestigious financial websites. Alex Cho started of as a contributor for Seeking Alpha, and went onto write for the Motley Fool for a brief period of time. By the end of 2013, Alex Cho's analysis of current events, and equities attracted a fairly massive following, and has earned him a reputation for firing straight from the hip. At times, Alex Cho can be extremely opinionated and controversial, but he always comes prepared with a solid stack of research. Currently, Alex Cho is the Senior Analyst and founder of AlexLeAnders.
You can follow Alex Cho on Twitter.

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