RealMoney Silver - Is Microsoft Back?

Is Microsoft Back?
By Jay Somaney
RealMoney.com Contributor
10/26/2007 11:56 AM EDT

Updated from 1:00 p.m. EDT on Oct. 25.

One quarter does not a trend make, but it was still a blowout quarter for Microsoft (MSFT) by any standards. The company reported earnings of 45 cents per share on revenue of $13.762 billion vs. consensus of 39 cents per share and $12.57 billion in revenue.

To top it off, Microsoft raised guidance going forward for fiscal 2008 (year-end June 2008) to EPS between $1.78 and $1.81 and revenue in the range of $58.8 billion to $59.7 billion vs. consensus of $1.73 in EPS on $57.42 billion in revenue. To me, that means that EPS will more than likely come in closer to $1.85 to $1.87 on revenue north of $60 billion when all is said and done.

The strong growth in the quarter came from its most important segments -- clients, servers and tools -- and the business division. The strength in revenue was due to strong PC growth (especially in emerging markets) and declines in piracy rates in overseas markets, as per management comments on the conference call. Management further stated that piracy rates will continue to go down through the course of 2008, which should again positively affect revenue and earnings going forward.

The company reported cash flow of $5.88 billion, almost 30% to 40% higher than most analysts had expected. Another important and potentially fast-growing segment was the company's online business services segment, which grew by 24%, mainly due to the aQuantive addition.

Bookings in the quarter were 30%, which is especially impressive given Microsoft's large revenue base. Another point that really jumped at me was that, despite beating revenue expectations by almost $1.1 billion $1.35 billion (depending on which analyst's model one looks at), the company's operating expenses were only up by $5 million to $25 million (again, depending on which analyst's model you were looking at). Massive leverage in Microsoft's business model, no?

I think the entire PC food chain is benefiting much more than most expect due to very strong demand in the emerging markets, especially India and China. I think this will continue to be the case for Microsoft in particular and also for the entire PC food chain, up and down. I believe that going forward, Microsoft will be easily able to deliver double-digit revenue growth.

Nothing to complain about as far as Microsoft is concerned.

Microsoft Preview: Expect a Good Quarter

Microsoft (MSFT) will report earnings this afternoon after the close of trading.

The Street expects the company to report earnings of 39 cents per share on revenue of $12.57 billion for the September quarter. For the December quarter, the Street is currently at 44 cents per share on revenue of $15.64 billion. For 2008 (year ending June 2008), the current consensus is $57.42 billion in revenue and $1.73 per share in earnings.

Microsoft has been in the news today after its announcement that it was taking a small stake ($240 million equity stake at a $15 billion valuation) in Facebook. Furthermore, the two companies will expand their advertising relationship by which Microsoft will become the exclusive third-party advertising platform for Facebook and also sell Facebook's advertising globally.

The investment is strategically important for Microsoft, as it ties the company to one of the fastest-growing social network sites. In addition, this investment will strengthen its online advertising business, which has been weak up until now.

Here are a few things to watch/listen for on the earnings release and conference call:

Online services spending plans.

Longer-term competitive issues from open-source software and other sectors.

Xbox demand going forward.

Vista sales.

Office sales.

International business.

Halo 3 sales.

How the aQuantive integration is coming along.

I believe the company will report good numbers for the first quarter and also offer good guidance for the second quarter on the basis of stronger-than-expected PC and Xbox sales, better-than-expected margins and lower share count.

Good luck into the call, whichever way you are positioned, good guy or dark-siders.