Microsoft Corporation Earnings: Will a PC Rebound Boost Its Prospects?

Microsoft has pushed heavily into new areas like mobile devices and cloud computing, but a resurgence in PC demand could drive earnings higher as well.

Dan Caplinger
Dan Caplinger
Jul 21, 2014 at 12:00PM
Technology and Telecom

On Tuesday, Microsoft (NASDAQ:MSFT) will release its quarterly report, and shareholders have seen the stock's price soar to levels not seen since the end of the tech boom in the early 2000s. As much as Microsoft has worked hard to answer competitive pressure from Apple (NASDAQ:AAPL) and other major tech players in the hot areas of mobile devices and cloud computing, the company still has a huge presence in the aging PC market. Although many left that market for dead, recent results from Intel (NASDAQ:INTC) show that a near-term resurgence in the PC industry could help drive growth for Microsoft and other companies with a major PC presence.

CEO Satya Nadella. Source: Wikimedia Commons.

Microsoft has been such a well-established part of the technology industry for so long that it has taken a long time for the company to execute the strategic shifts it knew it needed to make. But with help from new Chief Executive Officer Satya Nadella, Microsoft has finally started to turn the ship, and investors have anticipated that its efforts will succeed in improving the company's future prospects. Given those efforts, one short-term question investors have is whether an upsurge in PC sales could help Microsoft's legacy software business produce even better results. 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 report.

Stats on Microsoft

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$23.0 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Are Microsoft earnings poised to soar?
In recent months, investors haven't been too favorable in their views on Microsoft earnings, slashing June-quarter estimates by 10%. But the stock has nevertheless kept rising, with gains of almost 15% since mid-April.

Microsoft's fiscal third-quarter earnings announcement in April showed how strongly the company has been performing lately. On the consumer front, the new Xbox One gaming console continued to drive strong gains in sales and earnings. But Microsoft continues to rely on its enterprise customers as its biggest opportunity, and the company has built out its lineup to meet the new needs of its client businesses and keep up with the pace of innovation that efforts from Apple and other competitors previously spurred.

Source: Microsoft.

The key effort that has helped drive Microsoft's success is its emphasis on its cloud-based capabilities. The rise of the Office 365 subscription-software platform has been the most visible of those efforts, with about a million new consumer subscribers last quarter bringing its total subscriber count to around 4.4 million. As Microsoft emphasizes the ability to use Office functions across platforms and devices, the company hopes to lure more consumers toward using the cloud-based version of its software rather than buying permanent licenses outright. The benefit for Microsoft will be sustainable recurring revenue from continually updated software, rather than having to count on users to upgrade while maintaining older versions long after their initial release.

Interestingly, though, a decision might well end up adding business for Microsoft. The company stopped supporting its older Windows XP operating system in early April, which many users had held onto even through a number of subsequent upgrades. As Intel noticed in its quarterly report, the lack of support appears to have spurred a huge uptick in sales of PCs, and that in turn should help Microsoft as more newly installed operating-system and office-productivity software appears on those new machines.

Yet internally, Microsoft made a shocking move in just the past week, with the company laying off 18,000 workers. Even given Microsoft's size, the job cuts are substantial, but the move appears to be just another of the restructuring decisions that Nadella believes are necessary in order to unlock the full potential of Microsoft's future. In particular, by eliminating unnecessary layers of middle management, Nadella hopes that Microsoft can be quicker in making key strategic decisions and jump on opportunities more effectively. Given the pace at which Apple and other competitors have pushed innovation forward, Microsoft needs to speed up in order to keep pace.

In the Microsoft earnings release, watch closely for signs of PC upgrade activity from enterprise customers moving to more modern software offerings. Microsoft needs to seize the moment not just to retain its legacy customers but to cross-sell other products and services to get them fully engaged in the tech giant's future course.

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