Microsoft Corporation (MSFT): It’s a Long Term Opportunity

Microsoft Corporation (NASDAQ:MSFT)’s strong earnings in the third fiscal quarter of 2013 have proven that this technology stock is continuous on its growth path. Revenue of approximately $20.5 billion was slightly lower than the consensus estimate of $20.6 billion and EPS of $0.72 was $0.04 better than the Street’s expectation. The better-than-expected results were due to better margins and cost controls.

All of Microsoft Corporation (NASDAQ:MSFT)’s divisions showed good results this quarter except its declining PC sales due to the market’s poor reception for Windows 8. However, emerging- market PC sales have a lesser impact on Microsoft Corporation (NASDAQ:MSFT) given its lower average selling price and higher piracy rates in those regions. Unlike Windows 7, Windows 8 has failed to trigger a recovery in the PC market due to lack of touch-enabled Windows’ devices. To overcome this, Microsoft Corporation (NASDAQ:MSFT) is expected to increase its number of touch-enabled devices with lower prices, which will give an upside to the Windows 8-PC sales over time.

Windows is the future

Microsoft Corporation (NASDAQ:MSFT) had good earnings in its Windows division, posting a 23% increase in revenue to $5.7 billion from the prior year because of $1.1 billion in referral-upgrade offers. These numbers indicate a positive outlook considering the fact that the industry as a whole is currently experiencing declining PC sales.

Windows’ sales to the original-equipment-manufacturer (OEM) channel and transactional Office sales were hit by PC-market weakness. The same was offset by 16% growth in multi-year enterprise-licensing agreements (ELA) for Windows, Office, and server and tools units.

Despite the availability of Windows 8, around two-thirds of the enterprises are now using Windows 7 (up from 60% of last quarter) instead of XP. It seems Microsoft Corporation (NASDAQ:MSFT) is offering very attractive pricing and licensing terms and pushing the ELA model downstream into the mid-market.

Non-OEM Windows revenue was up a strong 40% led by corporate volume licenses, retail upgrades and Surface tablet sales. Surface units have not been disclosed by the company in this quarter, but Microsoft indicated for the first time that it has a multi-year contract account for $4 billion a year in recurring revenue, which will drive Surface revenue in the fourth quarter. Additionally, the company is likely to introduce a series of $300 tablets (possibly without Windows 8 capabilities) that could compete at a lower price.