SAN FRANCISCO — It may take the rest of 2016 to yield the fruits of CEO Satya Nadella’s turnaround labor, but some results should be apparent in its upcoming earnings report.
The Redmond, Wash-based tech giant will report its fiscal second-quarter results after the bell on Thursday, anticipated to be 71 cents earnings per share on $25.2 billion in revenue, according to analyst consensus reports from S&P Capital IQ.
Bernstein analyst Mark Moerdler is forecasting Street-beating EPS of 75 cents, anchored to continued momentum from Microsoft’s Azure cloud services and a gradual turnaround in Windows and Office 365 revenue. Roadblocks would include lower than expected guidance for the next quarter.
“This is an important risk to consider given that estimates for Microsoft’s Q3 results have come up and the company has a tendency to guide very conservatively (and) as with any quarter for Microsoft, there are always unknown unknowns,” Bernstein wrote in his analyst note.
Under Nadella, Microsoft has been feverishly reinventing itself from an isolated licensing fee-anchored enterprise to a more nimble and technologically adventurous company.
Nadella spent much of 2015 shedding bad investments such as handset manufacturer Nokia, forging partnerships with would- be rivals such as Salesforce and challenging employees to help the company innovate. More evidence of this expansive mindset came with recent news that the company would be purchasing its leased Silicon Valley properties, with plans for a 50% growth in Bay Area employees.
Microsoft’s stock has risen nearly 25% year over year to $52, outpacing the Nasdaq Composite Index’s 6.9% 2015 gain. This trajectory would seem to justify the more than $100 million in cash and stock Nadella has made since taking the reins in February of 2014.
Daniel Ives of FBR Capital Markets says he’s expecting “a slight beat, but no fireworks” for the most recent quarter. He calls the cloud the epicenter of Microsoft (MSFT) growth for 2016 and beyond. “Over the next 12 months, I’d like to see cloud hit a $9 or $10 billion annual run rate from the current $8 billion,” Ives says. “Windows 10 has been a big success (on 100 million devices since its release last summer), but now it’s about a conversion to revenue this (calendar) year.”
Microsoft’s Azure cloud is second only to Amazon’s AWS (Amazon Web Services) in the burgeoning space, a $16 billion annual computer-storage rental proposition. AWS has an estimated 30% of market share to Microsoft’s 10%, although Microsoft’s year over year growth rate of 96% tops AWS’s 51%, according to Synergy Research Group. IBM, Google and Salesforce round out the top five.
“Azure is a compelling option that is slowly closing the gap on AWS, and I don’t see anything taking away from that trend,” says Gartner Research vice president Adam Woodyer. “Microsoft is still tied to (shrinking) PC demand, but we do see a gradual decoupling on that front.”
Instead, the push is to grow users on the consumer and enterprise side by providing access points to its services via both mobile and desktop, says Forrester industry analyst Frank Gillett.
“It’s going to be about having an account relationship (with Microsoft), so that the company can then engage those customers and make money on services, like extra storage on (Office 365’s file sharing platform) OneNote,” he says. “The goal is to be with customers wherever they are. Microsoft is mid-course and so far it’s looking like a good trajectory. They’ve gotten themselves out of the question-mark zone.”
Headwinds for Microsoft continue to be the shift away from PCs (75 million PCs shipped out globally in the fourth quarter of 2016, an 8% year-on-year decline, according to Gartner) as well as the ill-effects of a strong dollar (more than half of Microsoft’s revenue comes from outside the U.S.). Looming opportunities for the company include its aggressive forays into new technologies such as virtual and augmented reality, says Scott Kessler of S&P Capital IQ.
“Lots of large cap tech companies such as Apple, Alphabet and Amazon, companies with more cash than they know what to do with, are look at the megatrends to see if there are opportunities not to be missed, with VR being one of them,” says Kessler, noting that Microsoft’s well-received HoloLens device should hit consumers this year.
“I don’t expect those sorts of things to move the needle financially. But as much as companies are looking for market share, they’re also looking for mind share. For the latter, it’s important for Microsoft to be seen as a technology leader and innovator.”