Shares of Microsoft (MSFT) are up 27 cents, or 1.%, at $27.90 after the company last night slightly missed revenue estimates and beat on the bottom line by a penny in its fiscal Q1 report, and said it will keep operating expenses in the $30.3 billion to $30.9 billion range that it has previously forecast for this fiscal year ending in June.
Microsoft did not disclose how many units it has sold of its Surface tablet computer, and there is a surprising diversity of estimates on that this morning. Overall, the Street believes sales were not high, which is just fine for the Street given that erosion of margins from Surface sales has been a concern for analysts since the device was introduced last summer.
The Street this morning is adjusting estimates slightly, with no major changes up or down.
Walter Pritchard with Citigroup reiterates a Buy rating and a $35 price target, writing that his math suggests the company sold about 700,000 to 800,000 of the Surface.
He thinks the “worst on the PC front may be behind the company” given “it was the first quarter in several that Windows did not surprise to the downside”:
Despite contributing ~15% of cash flow, consumer Windows continues to dominate the debate and has sentiment negative around the stock. We�d note that while PC market declines in CYQ4 continued, there are signs that the worst may be behind the company. Looking forward, with 10� iPad sales plateauing, touch coming to more PCs, price points coming down, a lower-power Intel SOC architecture (Haswell) launching CYQ2/Q3 and a likely update to Win8 in the fall, Q4 may be the bottom for MSFT�s consumer PC business. We look to see further confirmation of this trend, but we think we saw the low in the stock at ~$26 and there is potential for sentiment improvements on the consumer Windows side into 1H13.
Pritchard slightly raises revenue for this year to $78.95 billion while cutting EPS by two cents to $2.79.
Michael Turits with Raymond James reiterates an Outperform rating and a $34 price target, writing that the Windows division “non-GAAP slightly beat consensus at up 5% y/y, boosted by Surface, and outperformed PC shipments on an OEM revenue basis as well,” referring to figures that include Microsoft’s deferred revenue component.
Turits thinks Microsoft sold 1 million Surface units.
He thinks judgement about Windows 8 will have to wait till the latter half of this year, when new touch-enabled PCs are more plentiful.
We remain positive on the Windows 8 strategy around client, mobile, server, and cloud. While W8 has not deflected the downward course of PC shipments thus far we expect the acid test to come in C2H13 with improved OEM hardware and distribution, and increasing value of both the enterprise and home ecosystem.
Adam Holt of Morgan Stanley reiterates an Overweight rating on the shares today, and a $37 price target, arguing that the company’s “material upside” in billings mean it is “decoupling” from the struggling PC market. “Looking forward, MSFT has left plenty of room to surprise favorably on Windows and rev. broadly, while mid teens FY13e EPS growth is not in the stock at 7x net cash.”
Holt notes the areas of shortfall in Windows revenue, but thinks the company has set the bar fairly low at this point:
Enterprise PC units, +1% offset consumer units, -2% YoY, while enterprise strength drove
double digit volume licensing growth. However, ASPs still declined ~4%, by our estimate, and OEM revenue declined 3% YoY as the ASP lift from strong corporate PC sales was slightly offset by a weaker premium mix and strong growth in lower-ASP emerging consumer markets. Looking forward, MSFT guided Windows revenue to trail the PC market in 1Q13 and track in-line with the PC market in FY13. However, we believe Windows units should modestly outpace the PC market in FY13 as 1) OEMs restock Win8 inventory and 2) Win 8 retail unit growth accelerates. For the first three quarters of the Windows 7 cycle, Windows units outpaced the growth of the PC market by 5% or more as OEMs built up inventory, and we think Windows 8 could drive Windows outperformance as well. Tablets and Surface will effectively be incremental to the forecasts we now have.
Holt doesn’t offer an estimate for Surface sales in the quarter.
For this year, he trimmed his revenue estimate slightly to $80.8 billion from $80.9 billion, and trimmed his EPS to $3.08 from $3.13.
Heather Bellini with Goldman Sachs reiterates her Neutral rating on the stock, and $30 price target, writing that “While enterprise-related segments remain strong, we remain concerned about MSFT�s ability to take back material share in the new consumer compute landscape.”
Bellini has one of the lowest estimates for Surface of the group: 230,000 units, which she estimates in part because Microsoft’s 73.5% gross profit margin was higher than the Street consensus of 73%:
Based on IDC�s view of PC shipment growth coupled with our estimated inventory build in the quarter (which we think benefitted them by roughly 6 points yoy) we estimate Microsoft generated roughly $140mn in Surface RT related revenue in the quarter, which assuming they all sold with a keyboard and thus had an average price point of $580 would yield approximately 230,000 units.�
She raised her March-quarter revenue estimate slightly to $20.4 billion from $19.8 billion, given that she “we now include Surface hardware revenue as we believe we have a reasonable basis for what was sold in December.”
Brendan Barnicle with Pacific Crest reiterated a Sector Perform rating on the shares and a $27 “fair value” estimate. He notes the Business Division as the main area of disappointment:
MBD had revenue of $5.69 billion, which was below consensus of $5.79 billion and was the
largest revenue category miss. MBD revenue is adversely impacted by the move to multi-year licenses as well as the stall ahead of the Office 13 release. MBD enterprise revenue growth of 4% was somewhat offset by a 2% decline in consumer revenue. Bookings in MBD grew 18% in the quarter.
Barnicle cut his 2013 estimate to $78.96 billion from $79.79 billion, but he raised his EPS estimate to $2.84 from 42.72 “on better Surface margins and a lower tax rate.” He doesn’t, however, provide an estimate for Surface unit sales.
FBR Capital’s David Hilal this morning reiterates a Hold rating, writing that the 60 million licenses of Windows 8 sold since the product went on sale on October 26th “speaks to softer demand than investors had initially expected”:
The company�s Windows revenues met expectations; however, we note that many on the Street have lowered estimates over the last few months in light of stronger PC headwinds and soft initial feedback around Windows 8/Surface. Overall, we would characterize the performance of the all-important Windows division as �underwhelming,� which speaks to some of the inherent challenges Microsoft has going forward, in our opinion.
Microsoft’s “Business Division,” containing the Office productivity suite, missed Street consensus of $5.79 billion by $100 million, Hilal writes. “While multiyear licensing remained the bright spot in the quarter, we believe investors were looking for more strength out of this high-margin business.”
Hilal raised his estimate for this year to $78.9 billion and $2.84 from a prior $78.4 billion and $2.83.
Jefferies & Co.’s Ross MacMillan reiterates a Hold rating on the stock and a $31 price target, writing that there were “few big surprises” and that while Windows division revenue of $5.88 billion was higher than consensus of $5.84 billion, because of revenue from original equipment makers (OEM), it was lower than his own estimate for $5.95 billion.
The one bright spot MacMillan seems to see is that the operating expense forecast might actually turn out better: “We view F2H13 as having OM upside potential (despite declining GMs due to Surface) due to implied big ramp in opex.”
MacMillan cut this year’s estimate to $79.49 billion and $2.77 per share from a prior $79.93 billion and $2.83 per share.
J.P. Morgan’s John DiFucci, who has a Neutral rating on the stock, writes that the quarter was “not bad, not good,” and that the Windows division sold a lot of licenses for inventory:
The Windows business continues to be coupled to the PC market, despite what appears to be a disconnect in the December quarter results. We believe the 900 bps outperformance of Windows relative to the PC market was primarily due to a build up of inventory in the PC OEM channel, as OEM partners built inventory in anticipation of the launch of Windows 8, like they typically do with any Windows launch.
He estimates Surface sales of 600,000 to 800,000, and he even offers his own diagram of the math (click for larger image):
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