Will Microsoft Earnings Grow From Its Restructuring?

Microsoft (MSFT 2.44%) is scheduled to release its quarterly earnings report tomorrow, and as usual, investors are divided in their opinions about whether the tech giant will reach its full potential or fall short of its rivals. But with the company having just announced a major restructuring, shareholders hope that a shifting of focus toward processes over products will help boost future Microsoft earnings.

With the unfortunate timing of its addition to the Dow Jones Industrials (^DJI 1.73%) in late 1999, Microsoft shares have been playing catch-up for years since the tech bubble burst. But on a dividend and split-adjusted basis, Microsoft stock has recently matched the level at which it entered the Dow. Let's take an early look at what's been happening with Microsoft over the past quarter and what we're likely to see in its quarterly report.

Stats on Microsoft

Source: Yahoo! Finance.

Can restructuring really help Microsoft earnings?
Analysts have lowered their views on Microsoft's earnings in the past few months, cutting their estimates for the June quarter by $0.03 per share and their full-year fiscal 2014 consensus by a nickel per share. But that hasn't stopped the stock from soaring, with a gain of almost 27% since mid-April.

The bearish view for Microsoft remains largely the same as it has for a long time. Microsoft hasn't delivered on the full potential of its newest products: Windows 8 and the Surface line of tablets have performed rather poorly. Although last quarter's earnings report included revenue and earnings-per-share growth of 18% each, just about all of the 23% gain in sales from the Windows division came from an upgrade offer that deferred revenue into that quarter. Meanwhile, falling PC demand continues to plague the industry, threatening to diminish the importance of its staple operating-system and office-software offerings.

Still, Microsoft's efforts to grow in important areas like mobile and gaming have borne some fruit. The Windows Phone operating system reached the No. 3 spot in shipments, with Microsoft's partnership with Nokia (NOK 3.62%) providing much of the boost thanks to the hardware-maker's Lumia line of Windows phones. Nokia has also benefited, recently making share-price gains and approaching profitability expected by the end of 2013. Microsoft's rates of app downloads and revenue have also more than doubled since the introduction of Windows Phone 8. Meanwhile, although it faced an initial backlash over the high prices and restrictions of its new Xbox One gaming console, Microsoft responded by making the Xbox One accessible for offline play and allowing the sharing and resale of games. As a result, the company has seen pre-order sales jump ahead of Sony and its PlayStation 4, even though the PS4 carries a lower price point than the Xbox.

The big question ahead is how the recent restructuring of Microsoft's corporate divisions will affect earnings. By diversifying beyond product-based divisions, Microsoft should be better able to address different needs within fast-growing niches like cloud computing and mobile devices. Yet business partners, resellers, and channel distributors aren't excited about the move, which they see as a knee-jerk response to rivals that threatens their relationships because Microsoft will become more of a direct competitor against them through its retail network. If Microsoft alienates its partners, then the changes could have a backlash that hurts earnings going forward.

In Microsoft's earnings report, watch for further discussion of how new divisions based on engineering, marketing, and research will work together to improve the company's product-development process. In the end, all the reshuffling could amount to nothing if it doesn't lead to more innovation that makes its way through the pipeline to become hit consumer products.

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