Microsoft Earnings Preview: Focus On Revenue Growth From Hardware And Cloud Services

by Trefis Team
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Microsoft (NASDAQ:MSFT) is set to announce its Q4 FY 2014 earnings on Tuesday, July 22 amid news that it’s planning to cut as many as 18,000 jobs next year. Most of the job cuts are expected to take place in business areas where an overlap between the newly acquired Nokia Oyj’s handset unit and Microsoft’s business exists. We expect the company to provide a deep dive into its restructuring process during this earnings call. For the quarter, we expect it to report growth in its hardware sales and cloud services as it has taken a host of steps such as launching Office for iPad suite to bolster revenues. We will continue to closely monitor its revenue growth from mobile devices, cloud and operating systems.

See our complete analysis of Microsoft here

Focus On Hardware Sales

Microsoft is increasingly pursuing its devices and services strategy to reduce its reliance on PCs and expand its footprint into the mobile hardware domain. In this earnings announcement, we are closely monitoring Microsoft’s unit sales and revenue numbers for its devices and consumer hardware segment. This would give us a fair indication of how these devices have fared and whether its devices are gaining traction among users.

Cloud Products To Drive Revenue Growth At Office Division

Microsoft is steadily making progress in the cloud domain. Its Office 365 offering continues to bolster revenues for Windows Office division, which makes up 40% of our estimated value. On the other hand, the strong adoption of cloud based Azure platform continues to drive growth at the server division, which makes up 24% of our estimated value for Microsoft.

The company continues to support the adoption of its cloud services through a host of initiatives such as free Office 365 for iPad. We believe that these steps will augur well for the company, and expect it to report growth in revenue run rate from cloud products and services. We anticipate that Office 365 will clock in over $1.7 billion annual revenue run rate as its clients adopt the feature-rich, cloud-based Office software.

Focus On Cloud Services To Bolster Server Division

Microsoft’s Windows server division is the second largest business unit, making up over 20% of its total value. Its flagship Azure platform continues to gain traction even as the company continues to form partnerships with companies such as Salesforce to boost its portfolio of services. We believe that the Azure platform 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. Additionally, many Microsoft customers depend on SQL servers for mission critical and business intelligence needs, specifically in the big data analytics domain. This will also help the company outpace the growth of the server market, which declined by 2.2% in Q1 2014. [1] Therefore, we expect the server division to report good growth in revenues in this quarter as well.

Windows 8.1 License Sales In Focus

The Windows Operating System (OS) is Microsoft’s third largest division and makes up around 10% of its stock value, according to our estimates. This division continues to report declining revenues due to a drop in global PC shipments. However, the severity of the decline eased significantly compared to the past seven quarters. According to Gartner, the global PC shipments market shrank by just 1.7% in Q2 2014. [2] However, Microsoft’s termination of support for Windows XP is forcing laggards to upgrade from this popular OS. We expect this will enable the company to post significantly higher sales for its Windows OS division.

In sum, new PC shipments, together with the existing installed base of Windows PCs, should help Microsoft post growth in license sales during the quarter. In this earnings announcement, we will continue to pay close attention to the numbers of licenses of Windows sold in both desktop and mobile verticals.

We have $41.21 price estimate for Microsoft, which is 6% below its current market price.

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  1. Worldwide Server Market Revenues Decreased -2.2% in First Quarter as Volume Server Demand Improves, According to IDC, May 29 2014, []
  2. PC Rebound in Mature Regions Stabilizes Market, But Falls Short of Overall Growth in the Second Quarter of 2014, According to IDC, July 9 2014, []
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