Microsoft Earnings Preview: Revenues Set To Improve As Cloud Services Gain Traction

by Trefis Team
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Microsoft (NASDAQ:MSFT) is set to announce its Q4 earnings on Thursday, July 20. In the previous quarter, the company reported 7.5% growth in revenues as its “mobile first, cloud first” strategy took center stage. In Q4, the company continued to develop an ecosystem of hardware, cross-device applications and value-added services around its core software products. For example, the company launched a slew of new hardware (laptops and tablets) that will directly compete with Apple in the premium segment of the market. These launches will help the company to stabilize and improve the penetration of its core software business, which includes Office (including office 365), Windows Server and Windows Operating System. Nevertheless, during this earnings announcement, we will continue to monitor the company’s growth in cloud services, and expect it to report growth across verticals.

See our complete analysis of Microsoft here

Productivity Revenues Improve As Office 365 And Dynamic CRM Gain Traction

Microsoft’s Office division makes up 38% of our price estimate for the company’s stock. In Q3 2017, Microsoft reported that its Office commercial products and cloud services revenue grew 7% (up 8% in constant currency), driven by Office 365 commercial revenue growth of 45% (up 45% in constant currency). The Office 365 consumer subscriber base grew to over 26 million, resulting in 15% growth in Office consumer and cloud services revenue.

We believe that this trend continued in Q4 as the transition from Microsoft’s perpetual license model for Office to a subscription-based Office 365 gained traction. As a result, we expect that Microsoft will report increases in both subscribers and the revenue run rate for Office 365. This will spur Office productivity revenue during the quarter.

Microsoft’s Dynamics Cloud services continue to report 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 see growth for Q4 and FY17. Furthermore, the integration of LinkedIn will boost revenues for the quarter and fiscal year.

Server Products To Report Growth Once Again

Microsoft’s Windows Server division contributes over 32% to our estimated stock price for the company. During fiscal Q3, the intelligent cloud segment (Azure, Server products, and enterprise services) delivered $6.76 billion in revenues, year-over-year growth of 11% (12% in constant currency). As a result of these products, the company’s Cloud revenue run rate exceeded $15.6 billion.  Furthermore, as Microsoft is ramping up its Azure platform to boost its Cloud revenues and compete with Amazon Web Services, revenues for Azure are expected to see further growth in the quarter.

Hardware Launches Bolster Personal Computing Division

Microsoft acquired Nokia’s Hardware phone division in 2014. Since the acquisition, it has decreased the production of handsets as the division was not able to make significant progress in the smartphone market. As a result, revenues from the phone division have declined massively in the past few quarters. Additionally, Surface revenue decreased 26%, driven by fatigue in its product line and increased competition in the 2-in-1 category. However, the company announced the launch of new hardware in May this year. This should help the company to stabilize its Hardware revenues. In this earnings announcement, we will continue to monitor the growth in revenues for Surface devices.

We currently have a $65.29 price estimate for Microsoft, which is slightly below the current market price.

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