Microsoft Earnings Preview: Sustained Growth Expected From Non-Computing Segments

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Microsoft (NASDAQ:MSFT) is scheduled to report its Q3 fiscal 2018 earnings on April 26. The company has reported strong revenue growth from non-computing revenue streams over the last couple of years. This trend has continued in fiscal 2018 thus far, with 12% net revenue growth through the first six months of the fiscal year to $53.5 billion. Productivity and Business Processes revenues were up 26% y-o-y to $17.2 billion, while Intelligent Cloud revenues rose 14% to 14.7 billion. Comparatively, More Personal Computing revenues were roughly flat over the comparable prior year period at $21.5 billion. We expect this trend to continue through the end of the fiscal year with net revenues expected to increase in high single digits for the full year.

Additionally, Microsoft’s adjusted EBITDA margin has consistently improved in recent years, from around 36% in FY 2015 to 39.4% in FY 2017. Despite an increase in Microsoft’s R&D and SG&A expenses in the period, its operating profit margin improved primarily due to healthier gross margins in the Personal Computing segment.

For the March quarter, we expect Productivity and Business Processes revenues to increase around 15% to $9.2 billion while Intelligent Cloud revenues are expected to increase 12% to $7.6 billion. Comparatively, More Personal computing revenues are expected to be roughly flat over the prior year period at $8.8 billion. We have summarized our Q3 FY’18 expectations on our interactive dashboard platform, where you can modify assumptions such as changes in expected segment revenue or margins to see how they impact the company’s expected EPS for the quarter.

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