Here's Why Microsoft Corporation Might Beat Analyst Estimates Today
Microsoft is set to announce its third-quarter earnings after market close today, and while analysts are expecting an earnings decline, a few important developments throughout the quarter could drive Microsoft's third earnings beat in as many quarters. The end of support for Windows XP, Microsoft's venerable operating system, could provide a long-lasting boost to earnings, as well as helping chip maker Intel Plus, the continued strength of Microsoft's enterprise products should continue to make up for a weak PC market.
The end of an era
On April 8, Microsoft officially ended support for Windows XP. This means that there will be no more updates or patches available for the operating system, leaving current users open to security issues. Windows XP still runs approximately 30% of PCs, leaving millions of consumers and businesses in a precarious situation.
On the enterprise side, companies have been slow to upgrade to Windows 7 or Windows 8. In fact, many companies have signed extended support agreements with Microsoft, paying the software giant a fee to continue to issue security updates while Windows XP is replaced. Big banks are a good example, forced to upgrade software on ATMs or face serious security problems. As of last month, about 95% of ATMs worldwide ran Windows XP, and the transition to a newer version of Windows will play out over the next year. JPMorgan Chase has paid Microsoft for a one-year extension as it installs Windows 7 on all of its ATMs, not a simple task, and Microsoft benefits from both the sale of Windows licenses and additional support revenue.
The Internal Revenue Service is another organization that was forced to pay Microsoft for an extension, as nearly half of the agency's PCs are still running Windows XP. This is a case where Intel will likely benefit as well, as older computers from when Windows XP debuted in 2001 may not even be capable of running Windows 7 or Windows 8.
Intel's recent earnings report suggests that PC sales are stabilizing, at least partly due to the Windows XP transition, with Intel's PC Client Group reporting a 1% year-over-year decline in revenue, a smaller decline compared the recent trajectory of the PC market. Unit volume was actually up 1% year-over-year, and the average selling price for desktop chips increased. This is good news for Microsoft, and the company may be selling more Windows licenses than analysts are expecting.
The strength of the enterprise
The enterprise business has been a bright spot for Microsoft for a long time, and solid growth in the second quarter led to a significant earnings beat for Microsoft. SQL Server, Microsoft's database product, grew by double-digits last quarter, and with the recent release of SQL Server 2014, the $5-billion-per-year product should post strong growth once again.
Office is the most important product in terms of profits for Microsoft, and the company's subscription-based Office 365 has been growing fast. The number of enterprise seats doubled year-over-year last quarter, and the recent release of a native iPad version of Office makes the subscription more attractive for consumers and companies using both PCs and iPads. The conference call will likely shed some light on how Office 365 is doing, and it's safe to expect substantial growth to continue.
The cloud is another area growing quickly for Microsoft, with the number of Azure customers more than doubling year-over-year last quarter. Microsoft is in a price war with Amazon and Google, with all three aggressively slashing prices on compute and storage, which may have a negative effect on earnings in the short-run. But, the high-value services that Microsoft offers via Azure will ultimately be what differentiates it from the competition, and while Microsoft still needs to execute, its status in the enterprise gives the company important advantages.
Like last quarter, Microsoft's enterprise business should continue to drive the company's revenue and earnings higher.
The bottom line
Microsoft should get a boost from the end of support of Windows XP, and given that it will take many companies at least a year to fully switch to a newer version of Windows, the positive effect on earnings could last longer than a single quarter. Along with continued strength in enterprise and growth in the cloud, don't be surprised if Microsoft manages to beat analyst estimates for the third quarter in a row.
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The article Here's Why Microsoft Corporation Might Beat Analyst Estimates Today originally appeared on Fool.com.Timothy Green owns shares of Microsoft. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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