Microsoft Preview: Cloud To Boost Revenues Across Productivity And Server Vertical

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Microsoft (NASDAQ:MSFT) is set to announce its Q1 FY 2017 earnings on Thursday, October 20th.  ((Microsoft Q1 Earnings Announcement)) (Fiscal years end with June.) Although, the company continues to gain traction in the cloud SaaS industry through its Productivity application (Office 365), CRM (Dynamic) and Business Intelligence Tool (Power BI, Azure Platform) , its effort to build a cache of hardware devices around its Windows 10 in order to establish its ecosystem has not yielded desired results. However, the company continues to develop an ecosystem of cross-device applications and value added services around its hardware and software. Microsoft has re-stated its commitment to developing a comprehensive suite of software that extensively uses Cloud technology, and is easily deployable on mobile devices. During this earnings announcement, we will continue to monitor its growth in cloud services, and expect it to report growth across its verticals. Furthermore, we continue to monitor the progress of its revenue growth from productivity (Office) and operating systems divisions.

See our complete analysis of Microsoft here

Cloud Revenues To Boost Topline Across Productivity And Server Divisions

Microsoft continues to build its portfolio of cloud services that will help it to adapt to the ever changing IT landscape, facilitated by improvement in underlying hardware and the advent of mobile devices. While a majority of Microsoft’s clients are Fortune 500 enterprise users, it is trying to gain a foothold with the price sensitive small and medium business clients by cutting their upfront costs for cloud services. In the previous quarter, the company reported $10 billion revenue run rate for its cloud services (quarterly revenue of close to $6.7 billion in previous quarter), which includes Dynamic CRM, Office 365 and Azure sales.

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In the upcoming earnings announcement, we expect Microsoft to report increases in both subscribers and the revenue run rate for Office 365.

Microsoft’s Windows Server division is the second largest business unit, making up 30% of its total value. The strong adoption of cloud-based Azure platform continues to drive growth at the server division. The Microsoft’s vision of cloud services allows customers to offer not only standalone applications, but also to interact seamlessly with Microsoft infrastructure and on-site applications such as Hyper- V, Windows Server and System Center, as well as other SaaS offerings. We believe that the cloud-based Azure platform and Dynamic CRM will be a key growth driver for Microsoft going forward, as companies around the world are looking to lower costs by adopting cloud-based services. Therefore, we believe the company will report good growth in revenues for these services in Q1 (Q3 CY16)  as well.

Windows OS Sales To Slide In The Quarter

The Windows Operating System (OS) is Microsoft’s third largest division and makes up around ~6% of its stock value, by our estimates. Microsoft still generates most of its revenues and cash from sale of perpetual license of their Operating system (Windows). While the company has over 330 million users for its Windows 10 software, most of these users have been acquired due to the free upgrade program undertaken by the company. As a result, we do not expect the company to report growth in OS revenues and this might not help the company to reverse the negative outlook on OS division. Overall, we expect revenues for Windows OS division to slide for the quarter.

We have $56.03 price estimate for Microsoft, which is 10% below the current market price.

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