We reiterate our Market Perform rating on ahead of its F2Q earnings release on Thursday, January 23. We are maintaining our F2Q estimates but lowering our already below consensus F14/F15 estimates to align with Raymond James IT Hardware research’s new PC shipment forecast and the impact of the ongoing shift to cloud. Our large reseller checks for Microsoft Corporation (NASDAQ:MSFT) were mixed this quarter, with some beating targets but several reporting disappointing quarters. Cloud momentum with Office 365 and Windows Azure appears strong and we continue to be positive on Microsoft Corporation (NASDAQ:MSFT)’s enterprise businesses. At 13x F15 P/E Microsoft Corporation (NASDAQ:MSFT) is fairly valued, in our view, given: a) management’s doubling-down on firstparty devices with the pending Nokia acquisition; b) the weak PC environment; c) lack of traction in mobile (tablets and phones); and d) uncertainty around the new CEO search and potential strategy shifts.
Microsoft Corporation (NASDAQ:MSFT): Lowering D&C License on Adjusted PC Forecast
We are maintaining F2Q but lowering F14 and F15 D&C license revenue estimates to align with RJ’s updated device forecasts. 4Q PC shipments were slightly worse than forecast according to Gartner, although Intel’s PC revenues reported last night were just above expectations. We now forecast 2013 and 2014 PC shipments to decline -10% and -2% vs our previous -9% and 0%. Our F14E D&C license decline goes to -6% y/y from -4%; F15E growth is now 2% versus 3% previously.
Microsoft Corporation (NASDAQ:MSFT): Enterprise Checks Mixed
While checks on a company as large as Microsoft Corporation (NASDAQ:MSFT) are more qualitative than quantitative, conversations with North America-based VARs and LARs indicated mixed enterprise results. Some contacts beat their targets, but several reported disappointing quarters. Cloud momentum around Windows Azure and Office 365 sounds strong though there were some indications of weakness in enterprise agreement (EA) renewals. We are maintaining our Commercial revenue estimates.
Microsoft Corporation (NASDAQ:MSFT) CEO Search Ongoing – Ford’s Mulally Out
In December, director John Thompson updated investors stating the board expected to complete Microsoft Corporation (NASDAQ:MSFT)’s new CEO search in the “early part of 2014”. Though never official, it was speculated the board wanted to complete the search before the end of CY13. In addition, on January 7 lead candidate, Ford CEO Alan Mulally, removed himself from consideration.
Microsoft Corporation (NASDAQ:MSFT) Lowering Estimates
We are lowering our F14 and F15 revenue estimates to $81,653 million (+5%) and $87,441 million (+7%) from $82,040 million and $87,962 million. Our belowconsensus F14E and F15E EPS go down further to $2.54 and $2.81 from $2.57 and $2.84. We have not adjusted for the pending Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) acquisition.