Microsoft Corporation Earnings Preview: All Eyes On The Cloud (MSFT)

Here's what to expect from MSFT's latest quarterly results

Microsoft Corporation (MSFT) is scheduled to release the earnings results from its fourth fiscal quarter on Tuesday, July 19 after the closing bell. Overall, analysts are expecting a solid quarter as the PC market showed signs of stabilizing and the march toward cloud computing continues.

Microsoft Corporation Earnings Preview: All Eyes On The Cloud (MSFT)Consensus estimates suggest earnings of 58 cents per share on $22.15 billion in revenue.

Microsoft’s Office 365 Cloud Transition Going Well

Nomura Holdings, Inc. (ADR) (NMR) analysts Frederick Grieb and Jaclyn Appell believe Microsoft’s Productivity and Business Process and Intelligent Cloud segments performed well and that the declines in the More Personal Computing segment moderated. Their survey of resellers suggested that the company came out ahead of plan in the June quarter, and they found that resellers were positive on the transition to the new cloud-based Office 365. They report that 71% of participants said customers are adopting Office 365 more quickly now than they were a year ago, and 25% of them said the adoption pace is about the same as it was last year.

They note that data from Gartner indicated a 5.2% year over year decline in PC shipments for the second quarter, indicating that the demand declines are moderating as it was the slowest decline recorded since the fourth quarter of 2014. They’re projecting a 4% decline in Windows OEM in the June quarter based on this data.

Microsoft is ending free upgrades to Windows 10 on July 31, and as of June 29, it had been installed on 350 million devices. At the company’s March Build conference, it said that initial option of Windows 10 was outpacing that of Windows 7 by 145%, and the Nomura team has found lots of positive views around the OS. They have a “buy” rating and $65 price target on Microsoft.

Microsoft Riding on the Cloud

Morgan Stanley (MS) analyst Keith Weiss and team have an “overweight” rating and $64 price target on the stock, and they focused on cloud margins in their July 13 earnings preview report. They note that the previous quarter left a number of questions, such as where demand for Azure comes from and whether it is cannibalistic or not. They also believe investors are wondering about the “gross margin path for Commercial Cloud” and about how vulnerable Microsoft’s earnings are to the macro events that are going on right now.

They report that their recent survey of CIOs indicated “strong spending intentions” around the company’s cloud solutions, which is certainly good news. The third quarter saw a 120% increase in Azure revenues in constant currencies and a corresponding deceleration in growth in the Server and Tools segment.

This is why cannibalization became a concern, but they believe that this weakness was cyclical and macro rather than cannibalization.

Speaking of cyclical and macro concerns, the Morgan Stanley team also addressed questions about Brexit. They explained that less than 20% of Microsoft’s commercial revenue is transactional and probably less than 5% of it is from the U.K.

Further, the Brexit vote came with only a week left in the quarter, which means any impact on the June quarter should be minimal with the bigger impact coming from currency swings. They believe that the weakening U.S. dollar could hurt the company’s earnings per share because the nature of recurring revenues means that they roll in gradually.

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