Microsoft will report fiscal first quarter earnings this Thursday, and there are a lot of metrics that investors will be watching.
Analysts expect $21 billion in revenue for the quarter. While that represents a 9.5% year-over-year decline, MSFT’s EPS is expected to rise from $0.54 last year to $0.59. Whether or not Microsoft earnings exceed expectations will be important, but if MSFT stock is going to surge higher, these three things will play a large role.
How’s Windows 10 Performing?
IDC estimates that PC shipments worldwide fell a whopping 11% in the third quarter to 71 million. Windows 10 launched worldwide on July 29. Therefore, consumers are electing to upgrade their existing hardware to Windows 10, rather than buying new PCs.
While that’s not necessarily great, the fact is that MSFT wants people using Windows 10 and hopes to create revenue through other areas of its business. For example, Bing is the default search engine for Windows 10, and its revenue jumped more than 20% last quarter, a direct correlation to Windows.
With that said, there were 75 million Windows 10 downloads in its first full month. The big question moving forward is whether MSFT can maintain this momentum and succeed where Windows 8 largely failed. Investors will have a good idea when Microsoft earnings are reported, and the answer should weigh on MSFT stock.
What about the cloud?
Microsoft’s future is in the cloud, and you can rest assured that when Microsoft earnings are reported, performance in the cloud will play a big role in what happens to MSFT stock
Last quarter, MSFT disclosed that its cloud business is on an $8 billion revenue run rate after growing 96% year over year. Investors expect that number to rise significantly, with a $10 billion run rate likely expected, and $9 billion considered a disappointment.
While the majority of MSFT’s cloud revenue comes from software-as-a-service, it is thriving in cloud infrastructure services thanks to the growth of Azure. Synergy Research estimates that cloud infrastructure services neared $6 billion in second-quarter revenue, maintaining a growth rate near 50%. Over the last year, MSFT has grown its market share from just 7% to over 10%.
As a result, investors have big expectations in this arena, and if Microsoft performs well in the cloud, there’s a good chance that MSFT stock will follow.
MSFT’s Ex-Computing Businesses Needs to Perform Well
All things considered, MSFT is a huge company with $93.5 billion in 12-month revenue and $18.1 billion in operating income. While it has many moving parts, the majority of MSFT’s business is tied to Windows, Office, and the domino effect created from success or failure in these two areas.
For example, if Windows 10 upgrades on PCs and mobile devices are strong, along with Surface sales, then Office subscriptions, Bing, and cloud-based revenue should also perform well. That’s really why the performance of Windows 10 and the cloud are so important for MSFT stock this quarter, and all quarters, for that matter.
MSFT’s Windows Server business is one of the only outliers, but also very important to what happens with MSFT stock after earnings. During MSFT’s last quarter server products/services rose 4% year over year, and that was after a negative Forex impact and cannibalization by Azure.
Now that MSFT has created new reporting segments, investors should be able to view the performance of its Windows Server and Azure as one, in the Intelligent Cloud segment. This segment was responsible for 25% of MSFT’s revenue during the last year, but well over 50% of its operating income. Therefore, it is imperative that MSFT continues to perform well with Windows Server and with cloud infrastructure products, which has a gross margin of 70% and can peak over 85%, according to Bernstein.
It All Comes Down to…….
Microsoft’s new financial structure should bode well for MSFT stock, adding transparency and allowing investors to see what parts of MSFT are performing well. This will be the first quarter since MSFT announced its new corporate structure, and it will now be easier to identify the 75% of MSFT that’s tied to Windows, Office, and computing from the 25% that’s cloud infrastructure and Windows Server-related.
Nonetheless, it should also be easier to identify how well Microsoft is performing in these key areas, and the domino effect it has on MSFT stock and business. While MSFT needs to meet or exceed analyst expectations for the quarter, just know that if Windows 10 upgrades, cloud revenue, and Windows Server revenue don’t perform well, MSFT stock won’t, either. In essence, these areas must be strong for investors to remain optimistic about the future of Microsoft’s business and MSFT stock.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
