Microsoft Corporation May Have Just Shortened Enterprise Replacement Cycles

Microsoft is scheduled to release its next earnings report on Jan. 28 after closing bell, and consensus estimates suggest earnings of 71 cents per share and $25.24 billion in revenue for the second fiscal quarter. The tech giant’s shares rallied today after a tough few trading days, climbing by as much as 3.15% to $52.07 per share during regular trading hours.

Analysts are starting to become incrementally more positive on Microsoft.

Microsoft Corporation May Have Just Shortened Enterprise Replacement Cycles

Microsoft changes support policy

In a report dated Jan. 22, Piper Jaffray analysts Katherine Egbert and Kevin Kumar exuded confidence about Microsoft’s new enterprise support policy. The company announced on Jan. 15 that any hardware running the newest silicon will need the newest Windows version in order to receive support. The Piper Jaffray team believes that Microsoft is doing this so that it can make the Windows experience more consistent and competitive. Also the new policy means that all future Windows hardware will get the best security, performance and everything else that typically comes along with new silicon.

The analysts add that Macs and Chromebooks both are integrated systems, so this is an important step. In the interim, Microsoft said PCs with Skylake chips that are running Windows 7 or 8.1 will receive support through July 17, 2017. At that point, anyone with hardware running these two operating systems must upgrade to Windows 10 or else not have full support for it.

Microsoft may have just triggered an enterprise upgrade cycle

Egbert and Kumar believe that this policy change will cause enterprise customers to purchase more hardware, thus shorting replacement cycles. They note that most consumers only buy a new operating system with they buy new hardware, but the majority of enterprise customers have different PC hardware that runs a standard OS with a standard configuration, they added. As a result, many companies frequently exercise their downgrade rights on Windows for new hardware to make sure that they remain compliant with the standard.

Microsoft’s new support policy effectively places a time limit on downgrade rights for Windows 7 and Windows 8.1. The analysts said because there is so much hardware running on Skylake chips, IT managers might decide that it’s just a lot easier to upgrade the rest of their older hardware and standardize their systems on Windows 10 instead of having a system with hardware running on different versions of the operating system.

A good move by Microsoft

They said although supporting two different versions of Windows can be done for some time, it’s not only cumbersome but also expensive. Also running a version that’s close to the end of support for it adds a lot of risk to their IT systems. As a result, they expect that as enterprises buy new hardware, the chances that IT departments upgrade all of their hardware to Windows 10 improve.

Further, they expect this new policy to improve Microsoft’s chances of hitting its goal of 1 billion devices running on Windows 10 within two or three years of launch. They note that XP EOS caused PC shipments to flatten out for one year, declining 8% last year as a result of a longer lifecycle for PCs, competition from smartphones and tablets, and the free Windows 10 upgrades that are being offered. The year before, PC shipments only declined 0.8% as a result of a sudden increase in PC replacements around the time Microsoft was ending support for XP.

Piper Jaffray has an Overweight rating and $64 per share price target on Microsoft. The firm estimates revenue of $25 billion and earnings of 70 cents per share for the quarter to be reported next week.