Microsoft (NASDAQ:MSFT) has been one of the bigger success stories in the stock market this year. Even with the recent jolt of a pullback in the S&P 500 as well as the S&P Information Technology Index, Microsoft stock has trounced the S&P 500 by 4.57 times YTD and has beaten the Technology Index by 2.16 times during the same time. This means there’s a lot on the line with Microsoft earnings.
MSFT will report its fiscal first-quarter earnings on Wednesday, October 24th after the market close.
This Microsoft earnings is a follow up to a successful fiscal Q4 report where the company reported yet again that its cloud computing division Azure bolster revenue by 20% — advancing by 33% over the previous quarter. Meanwhile in Microsoft’s PC unit, sales were up 16% — a 45% increase over the previous quarter. Only the productivity and business products saw a slowdown in its sales gains — with only a pickup of 10%.
Expect Microsoft Earnings to Show a Continued Shift Towards Subscription Revenues
Microsoft is one of the poster children for the transformation from unit sales into recurring income. So, rather than waiting for customers to buy new computers to sell them another copy of Windows operating systems and another copy of Office software — it is working to shift to subscription sales.
This of course means an increase in cloud services revenue for commercial and household customers with Azure. But it also means bundling cloud services and local physical products for companies, particularly in security-required markets known as hybrid-cloud products. And it also means providing contracts for software and services that customers pay for on an ongoing basis. This includes me; I use subscription software tied into Microsoft’s cloud storage and security for my daily operations.
Microsoft and Renewable Energy
Microsoft continues to broaden its services to its cloud customers — particularly on the commercial front. One of the newer services focuses on renewable energy. Cloud computing and data centers consume vast quantities of power. This is in addition to companies spending on power for offices, distribution centers and other operations and this includes Microsoft for its own operations.
And more and more companies like Microsoft — particularly in the publicly-traded space — are embracing renewable energy to appear as conscientious to environmental concerns.
And no, Microsoft isn’t getting into the power business. But instead, Microsoft has noted that even in its own renewable power bills there are variances that can add to budgetary strains due to weather for wind and solar power. No wind or too much wind, power costs more to keep things humming. No sun, again same issue.
Microsoft has rolled out services known as volume-firming. This works with third party insurers and reinsurers including German-based Allianz (OTC:AZSEY). Microsoft is bundling a form of power cost insurance to off-set short-term variability in wind and solar power that’s then insured by Allianz and other companies.
This shows further growth for Microsoft’s recurring income as companies including Facebook (NASDAQ:FB), AT&T (NYSE:T), Walmart (NYSE:WMT) and as noted above Microsoft are ramping up renewable power contracts in the many gigawatts.
Microsoft Earnings and Forward Guidance
Microsoft earnings will be important not just in the trailing numbers for overall revenue and per segment, but also in the guidance that management provides in its initiatives.
Cloud computing — which will also include LinkedIn — is rising and should continue to as Microsoft rapidly closes in on the leader in cloud services — Amazon (NASDAQ:AMZN).
However, by my research, I see that while cloud revenue will be up, Productivity and Business Processes should see lower growth or even a drop. Personal Computing is still Microsoft’s leading segment. And while it may well show less growth in consumer sales, these should be offset by commercial sales for computers, tablets and gaming devices.
Overall, revenue may well be down a bit from the previous quarter — by 7.21%. But the better news will be that over the year-ago quarter, revenue should be up 13.77%.
And operating profit should be down from the previous quarter (fourth) by 12.80% — but up 17.41% over the year-ago quarter.
The stock market is still jittery including for the technology stocks. But Microsoft earnings should come through for both its stock and the information technology sector as a whole.
MSFT’s dividend is running at 46 cents per share as declared on September 18th. I expect the next dividend to be declared on November 28th to remain close to that — since it was just raised. That equates to a yield of 1.66%, which is still a bit low for the cash generated by the company. But with proven growth backed by its rising recurring income, MSFT is a good dividend buy with growth as well.
Microsoft will publish its quarterly report after the market close on October 24th. You can access the report directly at https://www.microsoft.com/en-us/investor/. A live webcast of the earnings conference call will be made available at this link at 5:30 Eastern Time.
Neil George is the editor for Profitable Investing and by company policy does not have any current holdings in the securities mentioned above.
