The Zacks Analyst Blog Highlights: Microsoft, Intel, Apple, Nokia and AT&T

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Jan 23, 2012, 09:30 ET

CHICAGO, Jan. 23, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Microsoft Corporation (Nasdaq: MSFT), Intel Corp (Nasdaq: INTC), Apple (Nasdaq: AAPL), Nokia Corp (NYSE: NOK) and AT&T (NYSE: T).

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Here are highlights from Friday's Analyst Blog:

2012 Looks Bright for Microsoft

Microsoft Corporation's (Nasdaq: MSFT) second quarter results were a couple of cents higher than the Zacks Consensus Estimate. The last month has seen 10 analysts lowering estimates for the quarter, which took the Zacks Consensus down a penny. Therefore, without the revisions, Microsoft would have exceeded expectations.

While the client PC business was slightly impacted by the Thai flooding, all other areas of the business saw good growth. Investors reacted as may be expected, taking share prices up 2.42% in after-hours trading.

Revenue

Revenue of $20.89 billion was up 20.2% sequentially and 4.7% from last year, just short of consensus expectations of $20.93 billion. Growth in the last quarter was again led by the Entertainment & Devices segment (up triple digits sequentially), with all segments other than Windows growing strong double-digits. The increase from the year-ago quarter followed a similar pattern.

Management commentary and Intel Corp's (Nasdaq: INTC) results indicate that the enterprise refresh cycle continues and the Wintel combination is far from dead. Of course, we may expect some changes this year, as Microsoft launches Windows 8.

Segment Specifics

The Windows and Windows Live Segment generated 23% of Microsoft's quarterly revenue, down 2.7% sequentially and 6.3% year over year. Given PC unit decline of 2-4% (management estimate), it appears that Microsoft saw slight declines in its market share.

The weakness was again on the consumer side of the business (down 6% from last year), particularly in netbooks, excluding which consumer would have been up 2%. Apple's (Nasdaq: AAPL) iPad has played a major role in weakening demand for netbooks, something Microsoft will be addressing with Windows 8, which is expected to launch next month.

Enterprise refresh rates drove a 2% increase in that segment. Management also cited HDD supply shortage and macro economic uncertainty for the segment's weak performance in the last quarter.

OEM revenue was down 7%, as PC market declines, lower Windows attach rates and segment mix were negative, while channel dynamics remained neutral. Additionally, shipments to emerging markets continued to outpace those to developed markets.

The Microsoft Business Division, which generated 30% of revenue, grew 11.7% sequentially and 4.1% from last year. Business transactional revenue increased 3%, due to stronger attach rates worldwide. Consumer declined 17% (2% excluding the $224 million technology guarantee in the year-ago quarter). The annuity portion (multi-year licensing) was also strong, growing 12%.

Microsoft stated that other products, such as Lync (up 30%), Dynamics CRM (up 30%) SharePoint, Exchange and Dynamics ERP each grew double-digits from last year. Management expressed optimism about the cloud-based Office 365 that was launched in the third quarter and management stated that customer momentum was strong.

The Server & Tools segment, at 23% of total revenue was up 12.3% sequentially and 8.7% year over year. Microsoft's multi-year licensing revenue grew at a mid-teens percentage rate year over year, with both premium Windows server and System Center revenue and SQL server revenue growing double-digits.

The increase in premium revenue is encouraging, indicating growth trends in the business and also continued strength in the enterprise segment. Enterprise services also grew strongly. Virtualization and cloud computing are proving to be very beneficial for Microsoft.

Entertainment & Devices generated 20%, up 115.8% sequentially and 14.6% year over year. Xbox 360 led the U.S. console market in the last quarter and Microsoft stated that the company shipped 8.2 million units. Kinect sales were also strong, touching 18 million units in the last quarter. The gaming side of the business appears to be doing extremely well, with engagement increasing 50% from November to December.

Xbox Live memberships reached 40 million, up from 35 million at the end of the September quarter. All these subscribers will be able to access television content acquired through recent partnerships.

At CES 2012, Microsoft showcased new LTE Windows phones from Nokia Corp (NYSE: NOK) and HTC that will soon be available on the AT&T (NYSE: T) network. The new Windows Phone, code-named Mango (with deeper social experiences, office 365 integration and IE 9) is expected to put the company back into the smartphone business. Microsoft stated that Skype last year had 200 million subscribers.

Guidance Reiterated

Microsoft lowered the fiscal 2012 operating expense guidance to $28.5-28.9 billion.

Our Recommendation

We remain optimistic about Microsoft overall, based on the fact that it continues to gain from the enterprise refresh, emerging markets strength and growth in data centers and cloud computing. We also expect the entertainment division to benefit from pre-holiday builds and new products (Mango). Additionally, expense control remains quite good.

The sore point for Microsoft at this time remains the less than exciting growth trends in consumer-type computing markets in developed countries. Microsoft has significant exposure to this market, so the softness does have an impact on its results. We therefore have a Neutral recommendation on the stock.

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