Earnings Preview: Microsoft Corporation (MSFT)

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In the wake of the announcement that Microsoft Corporation (NASDAQ:MSFT) would be giving away its Windows 10 operating system — as an upgrade, anyway — it would have been easy to overlook the fact that MSFT has even bigger news in the queue for Monday.

Earnings Preview: Microsoft Corporation (NASDAQ:MSFT)Yes, after the market closes Monday, we’ll get the Microsoft earrings report for the second fiscal quarter of 2015.

As of the latest look, analysts are expecting mixed results. Though revenue is expected to rise modestly on a year-over-year-basis, earnings per share of Microsoft stock are predicted to move a bit lower.

Then again, it’s those kinds of uneven results that MSFT stock holders should expect from the company, which is clearly working to reinvent itself in a world that’s increasingly mobilized and cloud-based … two arenas Microsoft hasn’t found huge success in.

Perhaps that’s about to change.

So what can investors expect on Monday when Q1’s numbers are posted, and more than that, how will those numbers fit in the context of the bigger sales and earnings trend?

And for that matter, what other info is likely to move Microsoft stock?

Microsoft Earnings Preview

As of Thursday, analysts collectively expect MSFT to report sales of $26.32 billion for its second quarter of fiscal 2015, up 7.4% from the year-ago tally of $24.5 billion. Yet, these same pros are also looking for income to fall. Analysts believe the Microsoft earnings announcement will indicate a profit of 71 cents per share of Microsoft stock, down from 78 cents in the first quarter of 2014.

It’s apt to be the most disappointing quarter of the year, however. According to the latest figures, the software company still is on pace to earn $2.66 per share in fiscal 2015, up from last year’s $2.63. Fiscal 2016 is supposed to be an even better year, with a profit projection of $3.13 (up 17%), fueled by all the efforts underway right now (see below).

Revenue growth should roughly match the expected growth in income. For fiscal 2015, MSFT is expected to pump up its top line from 2014’s $86.83 billion to $98.23 billion — a 13.1% improvement — this year followed by a revenue total of $103.9 billion next fiscal year.

It’s unlikely the company would suggest any changes to these current outlooks within the Q2 press release. Rather, it generally updates guidance as part of its conference calls.

Key Catalysts for Microsoft Stock

While numbers always tell part of the story, they’re either history, or best guesses. Products and initiatives are the ultimate drivers are results. With that in mind, there are four big stories — themes, if you will — investors will want keep close tabs on during the conference call and over the course of 2015. In no particular order …

  1. HoloLens: HoloLens is a virtual reality device Microsoft unveiled on Wednesday, shocking consumers who didn’t see anything like it coming. The goggles blend a user’s physical reality with holograms, immersing them in an experience that’s more than just a visual illusions; wearers can build a virtual sandcastle on their very real coffee table. The technology scores 10 points out of 10 on the “cool” scale, though in light of the recent decision from Google (NASDAQ:GOOG, NASDAQ:GOOGL) to take its much-ballyhooed and sorta-similar Google Glass off the market, one can’t help but wonder if HoloLens lacks real marketability.
  2. Windows 10: This may be as much of an indictment on PCs as it is Microsoft’s increasingly irrelevant operating systems, though the two go hand in hand — Windows 10 could make or break the company, as it makes or breaks PCs. Calling a spade a spade, the decision to offer no-cost upgrades for current users of Windows 7 or Windows 8 to Windows 10 looks a little desperate. That’s because Microsoft is desperate. On the flip side, it might well be a stroke of genius, as it will allow MSFT to leverage its relationship with customers at a critical spot — right in their face when they start to use a digital device. The core of the upgrade is said to be a more intuitive experience, and better integration of multiple devices. Whatever the case, Microsoft needs to be able to honestly answer this key question: What does the company really hope to gain by giving Windows 10 away?
  3. Xbox: The gaming console has never been a major contributor to Microsoft’s success, but the company doesn’t seem willing to let it go. Quite the opposite, actually. The buzz is, Microsoft is aiming to ramp up the importance of its Xbox device by allowing owners of Xbox games to stream those games to any Windows 10 device. It remains to be seen if such versatility will make the consoles even more marketable, but it certainly can’t hurt.
  4. Mobile: It’s no secret Microsoft is losing market share on the smartphone front. The free upgrade to Windows 10 also applies to current users of Windows 8.1 for smartphones. It may or may not help, but as was the case with the Xbox’s ability to be played on a variety of devices, the upgrade certainly can’t hurt Microsoft’s success in the world of mobile devices.

Bottom Line for MSFT

Microsoft has a great deal on its plate at this point in time, and while the Microsoft earnings call is apt to shed some light on all four of these key facets, bear in mind the conference call won’t offer all the relevant details. Also bear in mind the company is likely to paint a compelling picture for all four initiatives, since it’s in the company’s best interest to do so.

Shareholders would be wise to take all of Microsoft’s comments with a grain of salt, and consider other, less optimistic point of view.

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

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