Microsoft (NASDAQ:MSFT) is set to announce its Q1 FY 2014 earnings on Thursday, October 24. During the quarter, the company unveiled its reorganization strategy that transforms Microsoft into a “devices and services” company. Moreover, Microsoft’s CEO Steve Ballmer announced that he will retire from the company within the next year. Additionally, the company is also in the middle of closing one of the most significant transactions in its corporate history. The company paid more than $7 billion to buy Nokia’s devices and services business so that it can compete with incumbents Apple and Samsung. 
In this earnings report, we are on the look out for a number of key announcements including the future leadership of the company and strategy for its new launches. Additionally, we are closely following the growth areas in various division of Microsoft.
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Device and Software Launch Strategy To Take Center Stage
With the global PC shipments still reeling from decline in demand, Microsoft is increasingly pursuing its devices and services strategy to reduce its reliance on PCs and expand its footprint into hardware and cloud services domain. The company is set to launch a host of devices and services in the coming month. Apart from the launch of new Surface tablet and the upgrade to its flagship Windows OS this month, the company is also set to release Xbox-One in the coming month. While the company continues to search for the next CEO to replace Steve Ballmer, we expect the company to share its strategy for new launches during this earnings announcement.
Office Cloud Adoption To Gain Traction
Microsoft’s biggest revenue driver is its Office productivity suite and makes up almost 40% of its stock value according to our estimates. During Q4 FY13, Microsoft’s revenues from this division grew by 14% to $7.21 billion, mainly due to increasing adoption of Office 365 that clocked in over one million subscribers and a $1.5 billion annual revenue run rate. The company announced a number of steps such as free Office 365 access to students to ensure that it continues to dominate the industry. We believe that these steps will augur well for the company and help it in maintaining its market share in the future. Currently, we estimate that the company has close to 93% share in productivity market. In the upcoming earnings announcement, we expect Microsoft to report increase in revenue run rate for Office 365 as its clients adopt the feature-rich, cloud-based Office software.
Focus On Cloud Services To Bolster Server Division
Microsoft’s windows server division is the second largest business unit making up over 20% of its total value. This division has been the fastest growing division and witnessed 8% growth in Q4 FY13, driven by higher SQL server sales and adoption of cloud based Azure platform. We believe that the Azure platform will be a key growth driver for Microsoft going forward as companies around the world are looking to lower costs by adopting cloud based services. Additionally, many Microsoft customers depend on SQL servers for mission critical and business intelligence needs, specifically in the big data analytics domain.
The company announced the next versions of Windows server and system center that will strengthen its services on Cloud OS. We believe that these servers, with cloud capability, will continue to outpace the growth server market. Therefore, we expect the server division to report good growth in revenues in this quarter as well.
PC Sales To Affect Windows OS Sales
Windows Operating System (OS) is Microsoft’s third largest division and makes up around 15% of its stock value by our estimates. This division continues to report decline in revenues due to decline in global PC shipments. According to IDC, global PC shipments continue to decline and the market shrank by 8% in Q3 2013.  Although, Microsoft is set to launch Windows 8.1 this month, we believe that decline in PC shipment will continue to affect Windows OS revenues in this quarter as well, and the company to report decline in sales. 
Online Service Division (OSD)
The online services division, which includes Bing search, MSN and aQuantive, contributes 4% to Microsoft’s value according to our estimates. This division continues to negatively impact Microsoft’s overall profitability as operating losses mount. However, this division did report some encouraging signs in Q4 as online advertising revenue grew 11% due to growth in search revenues from Bing. We expect this trend to continue, and the company to report growth in search revenues in this quarter as well. Additionally, we forecast Bing’s global market share to increase steadily throughout our forecast period.
We currently have $41 price estimate for Microsoft, which is approximately 15% above the current market price.Notes:
- See Microsoft Acquires Nokia’s Phone Division To Bolster Its Windows Phone Business [↩]
- Gartner and IDC: PC shipments continued to slide in Q3, but the worst may be over, October 9 2013, www.engadget.com [↩]
- Read Windows 8.1 May Not Bolster Microsoft’s Revenues In The Near Future for our take on the new launch [↩]