Microsoft Earnings Preview: Cloud, Hardware Likely Boosted Revenues For The Quarter
Microsoft (NASDAQ:MSFT) is set to announce its Q2 FY 2017 earnings on Thursday, January 26th. ((Microsoft Q2 Earnings Announcement)) (Fiscal years end with June.) Even as the company continues to implement its “mobile first, cloud first” strategy, its revenues improved by 3% year over year in Q1 2017 (Q3 CY16). Additionally, the launch of Surface Laptop and the new version of Surface Pro did help the company to boost its personal computing revenues during the year. The company continues to develop an ecosystem of cross-device applications and value-added services around its hardware and software. 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), operating systems divisions and hardware sales.
See our complete analysis of Microsoft here
Productivity Revenues Improve As Office 365 And Dynamic CRM Gain Traction
Microsoft’s Office division makes up 37.6% of Microsoft’s estimated stock price. Over the course of first three-quarters of 2016, the productivity and business process revenues for the company have grown by 3.72%, primarily due to 1% growth in commercial Office products and cloud services and nearly 45% growth in Office 365 commercial seats to 85 million. Furthermore, Office 365 consumer subscriber base grew by 16.5% to 24 million during the period and consumer Office revenues grew by about 10%.
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As Microsoft’s perpetual license model for Office transitions to a subscription-based structure, revenues will be negatively impacted over the short term, in our expectation. However, Microsoft will be able to monetize Office 365 over this extended period of usage, as users tend to use software over a longer period of time. In the upcoming earnings announcement, we expect Microsoft to report increases in both subscribers and the revenue run rate for Office 365.
The Microsoft Dynamics family includes six products. Microsoft’s Dynamics Cloud services continue to report an increased adoption, as Microsoft’s clients continue to adopt the CRM and ERP services. While Microsoft chooses not to disclose its Dynamics revenue allocation between CRM and ERP, we expect Dynamics software to report growth for Q2 FY17 (Q4 CY2016).
Server Products To Report Growth Once Again
Microsoft’s Windows Server division is one of the fastest growing divisions of Microsoft and contributes over 36.8% to Trefis’s estimated stock price. During the first three-quarters, the Intelligent Cloud segment (Azure, Server products and enterprise services) delivered $19.19 billion in revenues, generating year-over-year growth of over 6%. While Server products and Cloud services revenue grew in mid-single digits, driven by growth in Microsoft SQL Server, adoption of the cloud-based Azure platform resulted in triple digit growth in its revenues. As a result of these products, the company’s Cloud revenue run rate exceeded $13 billion.
The company is significantly ramping its Azure platform to boost its Cloud revenues through IaaS and PaaS solutions. [1] Furthermore, its SQL offering continue to lead the server software industry as the technology moves to the Cloud and Big Data analytics gains take center stage. Based on these trends, we believe that this division will report good growth in revenues for Q2 FY17 (Q4 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 the sale of the perpetual license of their Operating system (Windows). The company has over 400 million users for its Windows 10 software, and some of these users have been acquired due to the free upgrade program rolled out by the company. Despite the growth in adoption rate, the underlying PC hardware industry is witnessing a secular downtrend in demand. As a result, revenues of this division will continue to slide for the quarter.
Hardware Launches Bolsters Personal Computing Division
Microsoft acquired Nokia’s Hardware phone division in 2014. Since the acquisition, it has ramped down the production of handsets as the division was not able to make headway in the smartphone market. As a result, revenues from phone division have declined by over 90% in the last nine months. However, Microsoft’s personal computing division has done exceptionally well in the first three-quarters of 2016, largely due to the launch of its Surface devices. The revenues have declined marginally by 0.90% to $27.64 billion.
In order to ensure that the company continues to strengthen its position with the hardware offering, it launched a host of devices and solutions in 2016. [2] It is rumored that the company also plans to launch Surface Phone to cater to premium Smartphone industry so that it can strengthen its eco-system of Surface devices. [3]
While we expect that the company is nearly done with phasing out its phone hardware, the revenue for the devices segment will report growth in Q2 FY17 (Q4 CY16).
We currently have a $58.59 price estimate for Microsoft, which is 6.5% below the current market price.
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