Microsoft Corporation (MSFT) Rallies After Strong Results

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Microsoft Corporation (NASDAQ:MSFT) shares rose more than 6% in premarket trading after last night’s strong first fiscal quarter results. Citi analysts report that almost all of the company’s businesses were ahead of their estimates. Most of the upside came under the company’s consumer business, and overall gross profit was higher while margins were lower than expected.

Microsoft Corporation (MSFT) Rallies After Strong Results

Microsoft’s new reporting strategy reveals good results

This was the first quarter in which Microsoft Corporation (NASDAQ:MSFT) reported under its new reporting structure. The company reported earnings per share of 62 cents, which were ahead of Citi analysts’ Walter H Pritchard and Kenneth Wong’s projection of 59 cents. Microsoft also indicated that it had gotten its operating expenditures under control, although gross margins were not where the analysts would have liked them to be.

They suspect those margins could come down even further, although management didn’t lower their margin guidance at their recent analyst meeting.

Microsoft’s Devices and Consumer segment driving results

The analysts were estimating Devices and Consumer revenue of $6.47 billion, and Microsoft Corporation (NASDAQ:MSFT) came out well ahead of that at $7.46 billion. Licensing fell only 7%, and there were signs that the PC market may be bottoming out. This bottom has slowly been emerging over the last three or four months.

Hardware revenue is now part of Microsoft’s Devices and Consumer revenue, and it was also far ahead of Citi’s estimate. However, Hardware may have been the key driver of pressure on Microsoft’s margins. Nonetheless, the tech giant managed to beat their gross margin projection of $13.2 billion, reporting $13.4 billion for the first fiscal quarter of 2014.

Commercial licensing also beat their estimate of $9.2 billion, coming in at $9.6 billion for the quarter. However, this was offset by $300 million of unearned revenue, which was less than Citi was expecting.

Margins versus profits at Microsoft

The analysts note that this time around, Microsoft Corporation (NASDAQ:MSFT) didn’t discount or offset revenue with marketing spend like it did in the previous quarter. The company missed their gross margin estimate of 75.6%, reporting a margin of 72.4% for the quarter. Nonetheless, it beat their gross profit estimates.

They note that a higher mix of Devices and Consumer drove gross margin variance because commercial gross margins were in line with their estimates.

Citi analysts continue to rate Microsoft Corporation (NASDAQ:MSFT) as a Buy with a $35 per share price target.

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