Microsoft Corporation (NASDAQ:MSFT)’s strong earnings in the third fiscal quarter of 2013 have proven that this technology stock is continuous on its growth path. Revenue of approximately $20.5 billion was slightly lower than the consensus estimate of $20.6 billion and EPS of $0.72 was $0.04 better than the Street’s expectation. The better-than-expected results were due to better margins and cost controls.
Windows is the future
Microsoft Corporation (NASDAQ:MSFT) had good earnings in its Windows division, posting a 23% increase in revenue to $5.7 billion from the prior year because of $1.1 billion in referral-upgrade offers. These numbers indicate a positive outlook considering the fact that the industry as a whole is currently experiencing declining PC sales.
Windows’ sales to the original-equipment-manufacturer (OEM) channel and transactional Office sales were hit by PC-market weakness. The same was offset by 16% growth in multi-year enterprise-licensing agreements (ELA) for Windows, Office, and server and tools units.
Despite the availability of Windows 8, around two-thirds of the enterprises are now using Windows 7 (up from 60% of last quarter) instead of XP. It seems Microsoft Corporation (NASDAQ:MSFT) is offering very attractive pricing and licensing terms and pushing the ELA model downstream into the mid-market.
Non-OEM Windows revenue was up a strong 40% led by corporate volume licenses, retail upgrades and Surface tablet sales. Surface units have not been disclosed by the company in this quarter, but Microsoft indicated for the first time that it has a multi-year contract account for $4 billion a year in recurring revenue, which will drive Surface revenue in the fourth quarter. Additionally, the company is likely to introduce a series of $300 tablets (possibly without Windows 8 capabilities) that could compete at a lower price.
Windows phone
The Windows phone is also proving successful for Microsoft. Its deal with Nokia Corporation (ADR) (NYSE:NOK) is a good example. This deal will benefit both companies in terms of economics as well as market share. Nokia Corporation (ADR) (NYSE:NOK) pays Microsoft royalties for using Windows on its devices, and, on the other hand Microsoft pays Nokia Corporation (ADR) (NYSE:NOK) $250 million in platform-support payments every quarter. As both companies are facing tough competition in their respective industries, Windows phone 8, just like Windows phone 7 (Lumia 710/800), has allowed these veterans to re-establish themselves in the race.
The launch of Lumia-embedded with Windows OS has opened up a new source of revenue and has made Nokia Corporation (ADR) (NYSE:NOK) popular among the smartphone devices. In fact, in Nokia Corporation (ADR) (NYSE:NOK)’s recent earnings, Lumia was a significant revenue driver. With the announcement of the new Lumia phones, there is likely a huge potential for the Windows phone in the future. Side by side, HTC 8X Windows Phone 8 and Samsung ATIV S are also showing the increasing popularity of the Windows phone.
Windows phone is easier to use and offers a flawless experience, when compared to Apple Inc. (NASDAQ:AAPL)’s iPhone interface — which is dull. (The icons that are placed at the bottom of the screen offer very little information.) Additionally, the Windows OS is unique and exclusive, whereas Apple Inc. (NASDAQ:AAPL)’s products can be easily copied, outdated, or fall out of fashion.
Windows 8
Microsoft’s PC-market and Windows 8 sales should pick up in 2014 because of Intel Corporation (NASDAQ:INTC)‘s Haswell and new-chip processor Bay Trail. The Haswell processor will support hardware including motherboards, systems, laptops, convertibles, and tablets. As a result, Intel Corporation (NASDAQ:INTC) is expecting a recovery in global PC demand.
Intel’s earlier Bay Trail Atom chip was made for tablets only, but now convertible and detachable PCs, along with desktops, will also use the processor. The Bay Trail processor aims toward the low-cost market, which will expand the volume of Intel architecture-based systems, both for Windows 8 and alternative operating systems.
Strong cash balance
Another lucrative point from a Microsoft investor’s perspective is its strong cash balance. Currently, it has $68.3 billion on its balance sheet, or $8.13 per share. Just like Apple, 30% of the Microsoft’s share price consists of pure idle cash, which it is using in financial activities and in giving dividends to its shareholders.
Microsoft is also benefiting from its low debt-to-equity ratio (approximately 0.2) and is currently giving a dividend yield of about 2.9%. This shows that the company will again give higher dividends in the fourth quarter. Recently, Apple has approved a 15% increase in its quarterly dividend, yet its dividend history is poorer in comparison to Microsoft.
Microsoft annual dividend history
| Fiscal Year End | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 E |
|---|---|---|---|---|---|---|---|---|
| Per-Share Dollar Amount | $1.34 | $0.39 | $0.43 | $0.52 | $0.52 | $0.64 | $0.80 | $0.92 |
Apple dividend history
| Fiscal Year End | 2006 to 2011 | Jul-2012 | Oct-2012 | Jan-2013 | Apr-2013 |
|---|---|---|---|---|---|
| Per-Share Dollar Amount | $0 | $2.65 | $2.65 | $2.65 | $3.05 |
It’s a long-term opportunity
Microsoft presents an opportunity for investors due to the huge potential of future Windows 8 devices and the Windows phone coupled with a strong cash balance and dividend history. The decline in PC sales will further boost its Windows OS and Surface Tablet sales.
Microsoft’s stocks remain attractively priced for value as well as income investors. Over the past 10 years, Microsoft’s average PEG is 9.8 and it earned $2.82 per share in its past four quarters. Overall, the company looks profitable for long-term growth. I would recommend a buy on this stock.
The article Painting a Perfect Investment With Windows originally appeared on Fool.com and is written by Ranu D.
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