MSFT Preview: Expect Another Solid Quarter

Microsoft (MSFT - commentary - Cramer's Take) is scheduled to report its fourth-quarter results tomorrow after the close and will have a conference call at 5:30 p.m. EDT. Current consensus estimates are for revenue of $15.65 billion (up 17% year over year and 8% quarter over quarter) and EPS of 47 cents.

In the prior quarter, Microsoft reported revenue of $14.457 billion (flat year over year and down 12% quarter over quarter) and EPS of 47 cents. Excluding a one-time revenue deferral in the prior year's quarter, revenue growth would have been 14%. The gross margin was 82.6%, down 250 basis points year over year but up 420 basis points sequentially, on lower Xbox hardware sales. The operating margin was 30.5%, down more than 1,500 basis points from last year and 910 basis points from the prior quarter, due to a $1.5 billion fine paid to the European Union.

The balance sheet remains among the strongest of any company. Cash from operations was $7.1 billion, which was comparable to last year's $7.30 billion. The cash account increased more than $4.0 billion, to $25.3 billion. Accounts receivable declined $1.8 billion, with days sales outstanding declining two days, to 62 days. In addition, the unearned revenue account was $12.1 billion on the balance sheet, flat with second quarter, and the contracted not billed value increased sequentially to more than $11.5 billion. The company estimated PC unit growth at about 8% to 10% vs. expectations of 9% to 11%, but overall bookings increased 14% over last year.

The client segment was $4.03 billion (down 24% year over year and 7% quarter over quarter), with an operating margin of 76.9%. These numbers created a lot of controversy, but, after normalizing for last year's events, client revenue actually increased 9% year over year. Servers/tools revenue was $3.26 billion, up 18% year over year and down 1% quarter over quarter. The segment's operating margin was 33.5%, down 210 basis points from last year and 230 basis points up from the second quarter. Business solutions remains the single largest business segment at $4.75 billion (33% of total; down 2% year over year and 1% quarter over quarter), with an operating margin of 66.1%. Entertainment revenue was $1.58 billion, up 70% vs. last year but down 49% quarter over quarter from the strong holiday quarter. The operating margin remained positive at 5.6%.

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At the time of publication, Faulkner had no positions in the stocks mentioned, but The Telecom Connection Model Portfolio was long Microsoft.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Faulkner appreciates your feedback; click here to send him an email.

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