New Segmentation Gives MSFT Stock a Cloud to Ride

The good news is, Microsoft (MSFT) will be changing the way it reports each of its segment’s quarterly results, reflecting changes in the way technology works and is used over the past several years (i.e. Microsoft realizes it’s now all about the cloud as a business line in and of itself).

New Segmentation Gives MSFT Stock a Cloud to RideThe bad news is, owners of MSFT stock may not have any better picture of how the overall company is doing once the reclassifications go into effect for the Microsoft earnings update due on Oct. 22.

Still, it begs the question … what and why has Microsoft done to ramp-up investor transparency?

The New and Improved Microsoft Road Map

On Tuesday, Microsoft gave owners of MSFT stock a preview of what its future quarterly reports will look like. In the simplest terms, the software and technology giant will reduce the number of distinct categories it delineates from six to three. Though less detailed in most regards, the new breakdown will actually offer more meaning to the market.

The new reportable divisions consist of:

  • Productivity and Business Processes: This division includes Office and Office 365 for commercial and consumer customers, plus Dynamics and Dynamics CRM Online.
  • Intelligent Cloud: This new grouping will be the one most watched by owners of MSFT stock going forward, and includes results from the company’s public, private and hybrid server products plus services like Windows Server, SQL Server, Azure and Enterprise Services.
  • More Personal Computing: The grouping will reflect the performance of licensing of the Windows operating system licensing, devices like the Surface and phones, gaming consoles and search.

The new reports will not only include revenue, but also operating profits by division.

To an enterprising investor willing to do the work, the results of the groupings above could have been more or less calculated using prior Microsoft earnings reports. The new segmentation, however, is expected to not only simplify the company’s performance snapshots, but deliver information to the market in a more meaningful way.

Though not said explicitly or indirectly, it would be naive to think Amazon’s (AMZN) decision to break out the performance of its cloud-based service division didn’t at least partially prompt Microsoft to do the same.

Microsoft Earnings Preview

To that end, what should MSFT stock investors expect come Oct. 22 when the company unveils its fiscal year 2016 first-quarter results?

As of the latest look, analysts are looking for a profit of 59 cents per share of MSFT stock on $21.07 billion in revenue. That projected bottom line is five cents better than the year-ago figure, although the top line is expected to fall 9% from Q1 2015’s $23.2 billion.

Almost as if to warn investors (or perhaps delight them), Microsoft went back and laid out the last eight-quarters worth of revenues and operating profits for the three aforementioned segments. As it turns out, “More Personal Computing” is a lot of effort for a little profit. Conversely, “Productivity and Business Processes” gives the company a great deal of bang for its buck in terms of profit margins.

As for “Intelligent Cloud”, that’s a pleasant surprise. Of the $93.6 billion in revenue the company generated in fiscal 2015, $23.7 billion of it (25%) came from the cloud. But of the $28.1 billion in operating profits those three segments created last year, $9.8 billion of it (35%) was driven by cloud-based services. That translates into operating margins of 41%.

The upcoming earnings report should indicate a similar revenue and profit breakdown.

The only downside to the past and future numbers is, the groupings still may or may not be the most telling. For instance, Office 365 could arguably be included as a cloud offering, and the Intelligent Cloud cluster includes a server business that might be better lumped into the business processes segment.

All the same, the new breakdown is said to reflect the way CEO Satya Nadella sees the company now and in the future, so it’s possible these three categories will better reflect their monikers as Microsoft morphs over time.

Bottom Line for MSFT Stock

As for the impact the new segmentation will have on MSFT stock, aside from the initial bullish bump following the announcement, it won’t likely be much of a factor.

When all is said and done, the market usually has a pretty good feel for how a company’s various division’s are doing, despite whether the organization reports them as such. Microsoft is no exception to that rule.

Either way, the company has to perform well to push the stock higher. Fortunately on that front — and despite the lackluster earnings outlooks — Microsoft is picking up steam again on the heels of cloud and software.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/msft-stock-microsoft-earnings-cloud-computing/.

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