Earnings highlights
Microsoft Corporation (NASDAQ:MSFT)’s revenues grew by 18% year-over-year. Now, let me tell you straight-up: No one was expecting this blowout quarter. The company’s performance was exceptional in light of the weakening data of PC shipments that came out from IDC. Analysts on a consensus basis were anticipating sales growth of 17% for the current quarter. Microsoft’s revenue beat analyst estimates by 1%, which is why the stock rallied by 3.58% on the Tuesday trading session.
Microsoft was able to grow earnings year-over-year by 20% on a diluted EPS basis (Microsoft’s EPS for the quarter came in at $0.72 per share which was a sizable improvement from its reported $0.60 per share in 2012). The growth in earnings was driven by Windows! Surprisingly the windows division grew its revenues by 23% year-over-year. Maybe the PC isn’t dead, as we are entering another seasonal upgrade cycle (Windows 8). Microsoft’s business division continues to exhibit stable growth as the company’s reported revenues grew by 8% year-over-year. The entertainment and devices division was the real standout in the past quarter, as revenues grew from $1.618 billion to $2.531 billion, year-over-year. The entertainment and devices division have been able to exhibit growth of 56% year-over-year. Perhaps, during the 2013 holiday season, Microsoft Corporation (NASDAQ:MSFT) will be able to post some exceptional growth figures in entertainment and devices, due to its rumored Xbox 720 launch.
Pertains to the competition?
Microsoft’s growth in entertainment and devices was driven by the Microsoft Surface Tablet, Xbox live memberships, along with growth in its Skype service. Skype calls were up 56% year-over-year: The growth in Skype calls is the primary growth catalyst in the entertainment division.
Skype will continue to out-compete traditional mobile phone carriers in the long-distance space. Skype offers unlimited calling to South Korea for $6.99/month as an example. Now compare that to AT&T Inc. (NYSE:T), which charges $3.99/month, along with an added $0.15/minute. A call to South Korea for 2 hours would cost $22, or you can go with Skype and pay $7/month. I chose South Korea because its high-speed internet penetration exceeds 100%, meaning it’s the most digitally connected economy in the world. A call to the world’s most digitally connected economy could cost up to 3 times more on AT&T Inc. (NYSE:T) than Skype. AT&T Inc. (NYSE:T)’s wireless division grew its revenues by 6% year-over-year in its recent annual report, whereas Skype was able to grow call volume by 56% year-over-year. In terms of growth, Skype is the clear winner. On the bright side, AT&T does offer a fairly sizable dividend yield of 4.70%. Microsoft provides a pretty good counter-offer to investors, with a dividend yield of 3.09%. AT&T offers yield and stability, but Microsoft’s network of products and businesses offer growth and yield. Microsoft is the better telephone company, hands down; the poor folks at eBay sold Skype prematurely to Microsoft, that sneaky Steve Ballmer.
Microsoft’s foray into Tablets wasn’t that huge of a financial success. The Microsoft Surface generated 1.5 million sales according to the latest Bloomberg estimate. That being the case, I couldn’t find Microsoft Surface sales figures in the latest financial release. Either way, Microsoft’s market presence in the Tablet space isn’t likely to improve by much, as Apple Inc. (NASDAQ:AAPL) has a remarkably strong grip in terms of market share. According to the same Bloomberg article, Apple Inc. (NASDAQ:AAPL) sold 22.9 million iPads in the same quarter (I happened to buy an iPad myself in the fourth quarter).
Here’s the problem with Microsoft Corporation (NASDAQ:MSFT)’s tablet strategy: It’s not cool enough. Microsoft’s growth strategy is extremely reactionary. Microsoft’s management team will literally wait to buy-out established companies (Skype), or launch its own iteration and attempt to grow market share over time (Xbox franchise).
While Microsoft has been able to succeed in the past with that method, growth through that method is extremely gradual. Apple already has an established ecosystem of applications for its products, and Apple Inc. (NASDAQ:AAPL)’s cool-factor certainly hasn’t died by any stretch of the imagination. In fact, Apple’s Smartphone market share grew by 3% in February, versus Microsoft’s market share gain of 0.2%.
Source: comScore
At this rate, you might as well say Microsoft Corporation (NASDAQ:MSFT) will need a whole century to catch up, because Apple is that much further ahead of the pack. 38.90% market share is phenomenal, considering Apple is a lone wolf, and Android is a collection of mobile phone developers (Samsung, LG, Motorola, and HTC). Not to down-play Samsung’s success and Motorola’s survival in Smartphones- It’s just that consumers have already made up their minds; it is all about Apple, and so as long as Tim Cook doesn’t ruin Apple’s product execution strategy, Apple’s shareholders should eventually see a recovery in the stock price.
Conclusion and guidance
Analysts on a consensus basis expect Microsoft’s earnings to grow by 0.70%. It is likely that Microsoft will be able to pull well-ahead of those low earnings growth estimates analysts have had in the company. Microsoft’s performance in its Windows division may receive a boost due to its upgrade cycle, and it also helps that the Xbox 720 is rumored to launch at Christmas. Ignore Christmas: The fact is Skype is killing it in the telecom space. Who wouldn’t want to place long distance calls at a deep discount? Microsoft’s mobile strategy, in terms of Skype, is a success. Microsoft’s attempt at mobile in Smartphones and Tablets is leery at best. The Surface was a failure in terms of generating demand. With that said, the business and cloud division more than make up for Microsoft Corporation (NASDAQ:MSFT)’s weakness in the tablet and mobile space.
Investors should lower their expectations from Microsoft’s mobile efforts going forward. But what should keep investors upbeat is the Windows refresh cycle, Xbox 720, Skype, and the Cloud. The 3.09% dividend yield is a bonus- sort of like the whipped cream that comes with your strawberry Frappuccino.
The article AT&T, Microsoft, and Apple at War originally appeared on Fool.com and is written by Alexander Cho.
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