Microsoft (MSFT) is due to report fiscal Q3 revenue and profit tomorrow afternoon, after the closing bell, with likely another stellar quarter by the Azure cloud-computing business, and probably some intense interest in whether Microsoft takes up or down its outlook for expenses.
The numbers to beat include Chief Financial Officer Amy Hood’s own forecast for revenue of $25.25 billion to $25.95 billion. And then there’s the Street’s average estimate, $25.77 billion in revenue and GAAP earnings of 85 cents per share.
Microsoft always challenges investors to follow the twists and turns of an incredibly complex income statement.
As a refresher, Microsoft reports revenue in three different segments. Its “Productivity and Business” group sells the Office productivity suite of Word and Excel, and the online version, Office 365. It also sells software programs used by businesses for things such as managing their general ledger, called “Dynamics.”
The second group, “Intelligent Cloud,” includes the company’s Azure cloud-computing business, its most interesting division for investors as the fastest-growing part of the Microsoft, nearly doubling year-over-year. But that division also includes the traditional sales of a software license for stuff that can be installed in a customer’s own data center, including various server programs such as SQL Server.
Last, “More Intelligent Computing,” the mostly oddly named of the group, includes Windows PC license revenue and the Xbox gaming franchise.
The simplest part of the story is that Azure, which has been a consistent growth story for many, many quarters now. It should again show tremendous growth. After 98% growth last quarter, the business may have risen 93% in the March quarter, according to both Credit Suisse’s Michael Nemeroff and RBC Capital’s Ross Macmillan, both of whom rate the stock at Outperform.
And PCs are also pretty simple: The market is still in the doldrums long term, meaning it doesn’t boost Microsoft’s licenses much, but according to the most recent PC data, it’s not as disastrous of late as in other quarters.
The more complex part of the story is the older stuff, such as SQL Server. RBC’s Nemeroff thinks that server software sales came in lower than the Street expects, perhaps dropping by 2%.
And when Hood offers her forecast tomorrow for Q4’s outlook, he thinks it may come in below the Street consensus revenue estimate of $28.07 billion, again, because of that lagging server-products group.
The other slightly complex element with Microsoft, and an area always of intense scrutiny, is expenses. Last quarter, Hood forecast expenses for the full fiscal year ending in June of $36.4 billion to $36.7 billion. Any change in that tomorrow could tip the hat to better or worse profit prospects.
Profit margins at Azure are always a focus, and the Street generally expects those margins get better and better as Azure gets bigger and gains more scale. RBC’s Nemeroff thinks Azure may have achieved a gross profit margin of 58% last quarter, up from what he estimates was 55% the prior quarter. Hood does not actually break out financials for Azure in dollars and sense, instead confining her remarks to talking about general growth trends.
Of course, there’s always room for a surprise in a quarter. If Hood were to start to disclose more details of Azure on a regular basis, that would be a great move toward transparency for investors.
Microsoft shares are down $1.16, or 1.3%, at $91.96, in afternoon trading.
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