Microsoft: a Buy Despite Challenges

Microsoft (MSFT) announced second quarter ended December 31, 2015 total adjusted revenue of $25.7 billion, down 1.5 percent year-over-year from $26.1 billion during the same period last year. The company has also provided revenue outlook for third quarter of fiscal 2016 and projects total revenue in the range of $21.6 billion to $22.3 billion.

Microsoft declared second quarter of fiscal 2016 adjusted net income of $6.3 billion or $0.78 per share, up 8.6 percent year-over-year from $5.8 billion or $0.70 per share in second quarter of fiscal 2015.

The key technology company reported year-over-year decline in its top line primarily due to a significant 5% decline in the revenue contribution from personal computing business segment and about 2% fall in revenue contribution from the company’s productivity and business processes operating segment which more than offset 5% growth in revenue contribution from the company’s intelligent cloud business segment.

Microsoft illustrated 2% year-over-year decline in total revenue for the productivity and business processes segment which grew 5% on constant currency basis with ongoing solid performance of Dynamics CRM Online and Office 365 somewhat offset by unfavorable foreign currency translations.
Net revenue for intelligent cloud business segment increased 5% with solid expansion in enterprise services and Azure, somewhat offset by unfavorable foreign currency translations.

Looking past the weakness

The revenue streams from server products and cloud services business segment enhanced 10% on constant currency basis, allowed by expansion across the company’s cloud platform unique services. In addition, revenue contributions from enterprise services business segment grew 16% on constant currency basis and allowed by expansion in its premier support services.

More personal computing business segment of Microsoft witnessed 5% year-over-year decline in revenue contribution to the company’s overall top line growth mainly driven by weaker windows and phone revenue and unfavorable impact of foreign currency translations. However, revenue contributions from the gaming sub-segment enhanced 9% on constant currency basis with notable increase in revenue from Xbox Live transactional event. The monthly active users on Microsoft’s live online games grew 30% year-over-year to approximately 48 million.

The revenue from video games expanded 57% on constant currency basis and allowed by highly popular games such as Minecraft and Halo 5. However, top line contribution from Xbox hardware fell owing to weaker sales volume of Xbox 360 consoles. Microsoft’s search revenue leaving traffic acquisition expenditures increased 21% on constant currency basis and allowed by improved search volumes and greater revenue per search. Approximately 30% of search top line contribution for December was enabled by popular Windows 10 devices.

The healthy revenue contributions from intelligent cloud and productivity and business processes business segments of Microsoft were somewhat offset by year-over-year revenue decline from the company’s more personal computing business segment which was driven by continued year-over-year reduction in revenue contributions from the declining phone and Windows sales.

Importantly, Microsoft returned $6.5 billion to the key stakeholders in form of dividends and strategic share repurchases which is in line with the company’s continued commitment to deliver attractive shareholder returns.

Microsoft has continued to deliver strong year-over-year total returns since last 5 years and comparable to the key returns provided by NASDAQ Computer and S&P 500 performance indices.

The key technology corporation seems keen on returning a majority of the invested capital to its shareholders in form of attractive dividends and well-timed share repurchases which converges well with its continued commitment to offer attractive investor returns.


Overall, the investors are advised to “Buy” equity in Microsoft Corporation considering the company’s significant growth prospects being supported by a solid financial position with impressive total cash position of $102.31 billion against smaller total debt position of $44.87 billion only, encouraging the company to make future growth investments while delivering attractive shareholder returns. The profit margin of 12.95% seems impressive as well. The PEG ratio of 2.12 indicate healthy company growth and somewhat better than the industry’s growth average of 1.54.
Published on Mar 29, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

Posted in ...