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Microsoft Corporation (NASDAQ:MSFT) “Other” Earnings Are a Recipe for Trouble

Microsoft Corporation (MSFT)

Microsoft Corporation may have beaten Wall Street forecasts when it revealed its numbers for the three months through June on Tuesday afternoon, but traders aren’t convinced. The Redmond firm didn’t perform well in the places the market wanted to see real growth. Instead it grew earnings with a boost from its “Other” segment.

Microsoft NASDAQ:MSFT

John DiFucci, a Jefferies analyst who released a report on Microsoft’s performance on Wednesday July 22, says that investors shouldn’t “believe everything they read.” He reckons that Microsoft will Underperform in the months ahead and put a price target of $37 on the firms shares on the back of the earnings.

Microsoft enterprise looks weak

Mr. Difucci noted that “corporate business looks to be weaker than anticipated” in the outlook for Microsoft’s first quarter of 2016. Enterprise spending is exactly where the firm is expected to grow in the years ahead, and it’s the reason that many on Wall Street think that Satya Nadella’s firm will outperform in the year ahead.

The firm’s earnings, which came in at 62 cents per share, got a boost from an extra 5 cents that the firm made in the “Other” segment on its report. Wall Street was looking for earnings of 56 cents from the firm, meaning that most of the boost to earnings came from that part of the report.

Other income includes things that are not core to the firm’s business, and is made up of investments  and foreign currency holdings for the most part.

Because of their ancillary nature, a gain in this area is not meaningful for Microsoft in the long term. The boost to headline earnings from the “Other” line on the report can be discarded, leaving Microsoft  with a much less rosy quarter than it first appeared.

Microsoft loses the market

It’s corporate licensing that Wall Street wants to see grow at Microsoft and though the segment did alright in the three months through June, there appears to be danger of it slowing through the rest of the year.

Commercial licensing revenue hit $10.45B in the quarter, below the $11.23B the firm recorded in the same three months of last year. The firm added 3m subs to Office 365, bringing the total number of paying users to 15m. The firm’s guidance for the current quarter, which Microsoft records as its first of 2016, appears to have caused the biggest trouble.

Mr. Difucci at Jeffries believes that the firm’s commercial segment will be weaker going forward, and that’s what’s causing the depression in the firm’s guidance.

Heather Bellini at Goldman Sachs said that sales in the segment could be a problem heading into the release of the earnings report. Bellini said growth in the area will not be enough to carry the weight of the firm’s Windows 10 launch. Goldman thinks that the Windows 10 launch will be worth relatively little to Microsoft as firms put off an upgrade.

Shaul Eyalat Oppenheimer was more upbeat. He reckons that there were four points that were key in the report.

“1)Continued improvement for the Cloud Services products; 2) Continued cost containment further supporting margins improvement; 3) Positive road-map for WIN10 and 4) MSFT further re-positioning itself for post-PC era,” will drive shares in the firm going forward says Eyalat.

On CNBC after earnings LongBoard’s Cole Wilcox tried to reconcile the firm’s earnings with his expectations for the future. “They’re in this transition phase as a business right now,” he told the team on “Closing Bell.”

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