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Microsoft Boosted by Surface: What Wall Street Is Saying (Update 2)

Updated from 9:39 a.m. EST to include thoughts from JPMorgan analyst.

NEW YORK (TheStreet) -- Microsoft (MSFT - Get Report) shares rose 2.2% to $36.85 in trading Friday after the software giant reported fiscal second-quarter results that blew past Wall Street estimates, thanks in large part to the Microsoft Surface, the tablet "no one" wanted.

During the quarter, Microsoft noted Surface sales more than doubled to $893 million from $400 million in the prior quarter. Also aiding results were the 7.4 million Xbox consoles sold, including 3.9 million Xbox Ones, which were released late in 2013. Both of those strong results helped Microsoft's devices and consumer unit grow revenue by 13% year over year to $11.91 billion.

For the full quarter, Microsoft generated $24.52 billion in sales and earned 78 cents a share. Those results handily beat estimates of analysts surveyed by Thomson Reuters, who were expecting $23.68 billion in revenue and earnings of 68 cents. 

As Microsoft struggles to find a replacement for CEO Steve Ballmer, the company is slowly but surely turning itself into the cloud computing giant many thought it would eventually become. Office 365 commercial seats and Azure customers both grew triple digits, with commercial cloud services revenue more than doubling, as the overall commercial segment grew revenue by 10% to $12.67 billion.

MSFT ChartMSFT data by YCharts

Wall Street analysts by and large were positive on the results, especially with the Surface performing so well during the quarter. Here's what several of them had to say:

UBS analyst Brent Thill (Buy, $43 PT)

"MSFT is growing a $50B enterprise business faster than peers half its size. CQ4 bookings +12% and revs +10% show significant outperformance vs large-cap peers and market share gains should continue with its software + cloud services and low TCO product strategy clearly resonating with customers. Nokia integration est'd late FQ3 could create some near-term est. confusion but we think stock gets to $43 on continued enterprise outperformance, rapid growth in its $2B+/yr enterprise cloud business, PC market stabilizing, troughing OM's and double digit dividend growth."

Deutsche Bank analyst Karl Keirstead (Buy, $42 PT)

"Strong Xbox One debut helps topline momentum. MSFT's F2Q14 revenues of $24.5b were up a solid 11% and came in above our/Street expectations of $23.9b/$23.7b. While commercial revenues were up a solid 10%, the upside surprise came largely via a consumer Hardware revenue beat of ~$800m, driven by the strong debut of Xbox One and better-than-expected Surface tablet revenues, which more than doubled q/q to $893m. Despite the mix shift to hardware (19% vs. 13% last year), strong margin controls helped to offset weak hardware gross margins of just 9%. Deferred revenues were lower than Street, but were impacted by the timing of renewals in the qtr, as the unbilled balance reached an all time high of ~$23b."

Credit Suisse analyst Phillip Winslow (Outperform, $42.50 PT)

"Microsoft reported Q2 results of $24.519 billion in revenue and EPS of $0.78, compared to consensus of $23.679 billion in revenue and EPS of $0.68. Analysis. Despite the continued weakness in server and PC shipments during the December quarter, Microsoft reported FQ2 results above consensus estimates-with strength across all operating segments, particularly D&C Hardware (with Surface revenue increasing from $400 million to $893 million quarter to quarter) and commercial Licensing (driven by better than expected transactional Office revenue). Additionally, Microsoft's Cloud Services business (consisting of Office 365 and Azure) grew 103% year over year, and although the transition to Office 365 and Azure is cannibalizing near-term revenue, we firmly believe that the lifetime revenue and operating profit of both Office 365 and Azure are meaningfully higher than the traditional license model."

Oppenheimer analyst Shaul Eyal (Outperform, $38 PT)

"Building on the prior encouraging quarter, MSFT reported strong F2Q14 results that exceeded consensus estimates on almost every metric and were further supported by a solid outlook. The strong performance was driven by: 1) improved macro environment; 2) stabilizing PC market; 3) improved execution internally and at MSFT's partners ecosystem; 4) both Commercial and Consumer segments performing well. There was no new message about the CEO selection process and we view it as the next near-term catalyst. With back-to-back strong quarters and encouraging outlook, MSFT could be indirectly suggesting there is no need for an external change. It remains to be seen. For now, we are slightly raising our estimates and PT."

Citigroup analyst Walter Pritchard (Neutral, $36 PT)

"We expect shares to remain range-bound until new CEO is named and investors gain visibility into LT strategic moves. Ironically, better performance in Windows and hardware reinforces the "devices and services" strategy and potentially sends Microsoft down the path of heavier investments here to capitalize on momentum. We don't believe this is what the incremental shareholder wants to see and this we see stock stuck in quandary we noted with our recent downgrade from Buy to Neutral."

JPMorgan analyst John DiFucci (Neutral)

"MSFT reported solid F2Q results relative to modest expectations that reflect a difficult fundamental backdrop. Most of the top line upside came from hardware on the back of strong Surface and Xbox shipments, but license businesses were also better than expected."

-- Written by Chris Ciaccia in New York

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Must Read: Microsoft CEO Hunt: Why There Are No Clear Contenders (Update 1)

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