By Jeremy C. Owens
The slowdown in personal computer sales due to supply-chain issues in recent months would have hurt Microsoft Corp. in past years, but the company’s pivot to cloud computing and cloud software should insulate it from any earnings fallout.
Microsoft /zigman2/quotes/207732364/composite MSFT -1.97% is scheduled to report its fiscal first-quarter earnings on Tuesday afternoon, as it rolls out its new Windows 11 operating system and PC makers struggle to deliver new machines. While the Microsoft of Bill Gates and Steve Ballmer would have faced a lot of Wall Street pessimism if PC shipments were mangled and a new operating system was not quickly adopted, Satya Nadella’s Microsoft should be just fine.
That is because analysts and investors are mostly focused on Azure, Microsoft’s cloud-computing answer to Amazon.com Inc.’s /zigman2/quotes/210331248/composite AMZN -1.38% Amazon Web Services, as well as cloud-software offerings, decreasing the importance of Microsoft’s PC business.
“Sustained digital transformation momentum should offset the impact from mixed PC unit shipment estimates from IDC and Gartner,” Morgan Stanley analysts wrote in a preview of the report, later adding, “While our negative growth outlook for Windows OEM pressures our longer term earnings expectation for Microsoft, we also note Windows OEM overall represents a decreasing mix of overall Microsoft revenue and gross profit.”
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Azure has made sure that Windows’ importance to Microsoft has decreased. The fast-growing cloud business is at the top of every analyst note about Microsoft, and analysts expect revenue to grow in the mid-40% range. (Microsoft does not disclose Azure performance except for percentage gain, despite AWS and Google /zigman2/quotes/202490156/composite GOOGL -0.67% /zigman2/quotes/205453964/composite GOOG -0.87% Cloud providing full revenue and operating profits for their competitive services).
“Fundamentally, ramping contribution from previously signed long-term Azure deals, continued Cloud migrations post-COVID, Microsoft’s intensifying focus on Cloud verticalization and strong Microsoft 365 seat growth can sustain durable longer-term Azure growth,” the Morgan Stanley analysts wrote.
There are factors that could add to Microsoft’s growth as well, especially in the forecast. The $19.7 billion acquisition of health-care-focused company Nuance is expected to close before the end of the calendar year, and Microsoft recently disclosed that its cloud-based revenue would dump into the same revenue bucket as Azure.
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While Microsoft did not disclose exactly how much that would mean, UBS analysts said in September that prior Nuance disclosures and a call they had with the company’s investor relations team led them to estimate that about 46% of Nuance’s revenue would be cloud-based. They estimated that would mean roughly $91 million in additional sales for Microsoft’s cloud division in the fiscal second quarter, if the full quarter were to be included.
Another bump could be coming in the future from increased prices for Microsoft’s most popular cloud software offering, Office 365. Microsoft is increasing prices more than 10% across the board for the product, which the company described as “the first substantive pricing update since we launched Office 365 a decade ago,” which also gives analysts confidence that Microsoft can withstand any supply-chain pressures on the PC market.
What to expect
Earnings: Analysts on average expect Microsoft to report earnings of $2.08 a share, up from $1.82 a share a year ago. Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — predict earnings of $2.22 a share.
Revenue: Analysts on average were modeling sales of $44.0 billion, which would be an improvement from $37.15 billion a year ago, after Microsoft forecast revenue of $43.3 billion to $44.2 billion. Estimize contributors expect $44.79 billion in sales.
Analyst expect $16.52 billion in sales from the “Intelligent Cloud” segment, after Microsoft guided for $16.4 billion to $16.65 billion; $14.67 billion in sales from the cloud-software-focused “Productivity and Business Solutions” segment, after a forecast of $14.5 billion to $14.75 billion; and $12.72 billion from “More Personal Computing,” after guidance for sales of $12.4 billion to $12.8 billion.
Stock movement: Microsoft shares have declined in the session following earnings releases in four of the past five quarters, though the last decline was only by 0.1%. The stock has increased 8.1% in the past three months and 45.2% in the past year, as the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.84% has grown by 4.1% and 31.6% in those periods, respectively.