One Analyst Not Calling For A Microsoft Calamity

Analysts at JPMorgan are expecting tougher times for Microsoft but are not calling for a disaster when the company reports results tonight.

The firm expects Microsoft to reduce guidance for the fiscal year ending June 30, but that timing of channel sales may delay the impact of slowing PC demand to the financials.

From Analyst John Difucci At JPMorgan:
We expect MSFT’s December quarter results to reflect the difficult PC
market, but not to the degree that it has affected others along that food
chain—yet. While the majority of MSFT’s profit is driven by PC unit sales
to the developed regions of the world, and that number has been relatively
weak and may become weaker into the near future, the timing of channel
sales may delay some of the negative effects to MSFT’s results.

• Majority of profit driven by Client and Office. We believe that about
80-90% of Microsoft’s profit is derived from the Client and Office
businesses, both of which are largely driven by PC unit sales in the
developed regions of the world.

• Sell to channel introduces sales timing difference. We estimate that
majority of the Client business (perhaps 60-80%) and a meaningful
amount of the Office business (~20% or more) are sold to the channel
(versus through the channel), so there may be a delay of a quarter of so
before the full impact of a deteriorating PC market hits MSFT’s results.

• Expect lowered guidance. While we expect results to be better than the
disaster that some may anticipate for the December period, the effects of
the PC market should be felt in subsequent quarters. Therefore, we
expect MSFT to reduce guidance, and while investors may breathe a sigh
of relief in the thought that this guidance is easily attainable and
conservative, it probably is not.

• Other segments. We expect solid Server & Tools and E&D performance
on the back of maintenance and Xbox, respectively, while the OSB will
likely continue to be a meaningful drag.

• We continue to rate MSFT Neutral with a $22 price target based on
our DCF.