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Microsoft (MSFT) Earnings Set to Decline in Tough Quarter

Microsoft Corporation (NASDAQ:MSFT) earnings are slated for release on April 23, and they better show an improvement in commercial software sales for MSFT stock to show any life.

Microsoft MSFT stockMSFT stock has been under a cloud ever since it missed revenue estimates in January and slashed its earnings outlook. MSFT stock went from positive to negative year-to-date on the news and hasn’t yet recovered. Indeed, Microsoft stock is down about 8% so far this year, lagging the broader market by 10 percentage points.

What spooked the market away from MSFT stock was some unexpected weakness in its most important business. Commercial software sales came in light, as the critical Windows and Office segments both had surprisingly poor quarters.

Windows Pro and non-Pro revenue declined 13%, hurt by lower average selling prices for academic customers. Office, meanwhile, saw consumer sales tumble 25% on weak sales in Japan and the transition to Office 365.

True, Microsoft is in the midst of a pivot more toward enterprise, mobile and services — especially with cloud-based services. But MSFT still needs consumer demand for Windows and Office to help manage the handoff.

Another knock against MSFT stock has been sluggish sales in Asia, led by weakness in the important Chinese and Japanese markets. And as is the case with all multinational corporation, the stronger dollar is also crimping top-line results.

Headwinds for MSFT Stock

Add it all up and Microsoft earnings are forecast to decline year-over-year. Profit is forecast to drop to 51 cents a share from 68 cents in the same quarter last year, according to a Thomson Reuters survey. Microsoft earnings are expected to retreat even as revenue grows. Analysts see the top line rising 3.4%, to $21.1 billion.

In many ways, the MSFT shift to enterprise, mobile and cloud-based services can’t come fast enough. MSFT software is dominant on PCs around the globe, but PC sales are like a melting iceberg.

In the first quarter alone, global PC sales declined 7.7%, according to market research firm IDC. That was largely due to the upgrade cycle from Windows XP having run its course, but a drop in enterprise demand was also to blame.

The decline in PC sales isn’t just hitting MSFT, of course. Earnings for the entire industry are expected to fall 26% this quarter and 11.5% next quarter. It’s a tough place for MSFT to be.

Happily, the shift to enterprise and services appears to be going well. Thanks to subscriptions for Office 365, MSFT is the largest cloud company for business customers, pulling in $5.5 billion per year in sales.

Another item likely to come up in the Microsoft earnings conference call will be the recent renegotiation of its long-term search deal with Yahoo! Inc. (NASDAQ:YHOO). The new terms of the agreement make it easier for either company to exit the alliance. MSFT and YHOO entered into a 10-year deal for search and advertising in 2009.

MSFT stock has been a longtime market laggard, and there’s no reason to believe Microsoft earnings will do anything to fix that. Perhaps the best Microsoft shareholders can hope for is a solid quarter that reaffirms the value proposition in MSFT stock.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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