Microsoft Corp. will have plenty to talk about when it reports the final quarterly earnings for its fiscal year on Thursday.
The tech company has confirmed that it is reorganizing its global sales team, a move that is expected to include thousands of layoffs—Microsoft
has confirmed the staff changes but not a number, which could be divulged alongside earnings. In addition, Microsoft is one of the biggest names among early adopters of a new accounting standard that will change the way all companies recognize revenue.
The specifics of Microsoft’s reorganization have mostly made it to the public through reports and a leaked email to employees from executive Judson Althoff, who said that Microsoft will organize the commercial-sales team by the size of the businesses they will target, with a large enterprise team and one focused on small- to medium-size businesses. The changes are reportedly meant to focus sales employees on Microsoft’s growing cloud-computing business, Azure, though more specifics will likely be shared on Thursday.
Big changes like these are typical for Microsoft at the end of a fiscal year. The company reorganized its reporting segments to kick off its 2016 fiscal year, and the 2017 fiscal year that ended in June started with the promotion of Althoff and other executives into leadership positions.
Some Microsoft analysts and investors have also received advance information on its other big change for the new fiscal year, the transition to new revenue-recognition standards. At its Microsoft Financial Analyst Briefing on May 10, Chief Financial Officer Amy Hood walked through the implementation timeline, saying the fiscal year-end report that is scheduled to arrive Thursday will be reported “the old way,” using the current accounting standards for revenue recognition, and guidance will be provided with only current GAAP in mind. Hood warned “there will be increased quarterly revenue volatility and changes in seasonality.”
In August, Microsoft plans to provide two years of quarterly restated financials, presumably in its Form 10-K filing with the Securities and Exchange Commission, so investors can analyze “old GAAP versus new GAAP.” As of the end of its third quarter, Hood said Microsoft had concluded that the changes will mostly affect the accounting for certain specifically identified license revenues, Windows 10 and multiyear commercial subscriptions. Revenue recognition related to hardware, cloud offerings including Office 365, LinkedIn and professional services to remain substantially unchanged.
What to expect
Earnings: Analysts on average expect Microsoft to report GAAP earnings of 61 cents a share, and adjusted earnings of 71 cents a share, according to FactSet. Contributors to Estimize, which crowdsources estimates from analysts, fund managers and academics, predict adjusted earnings of 74 cents a share on average.
Revenue: Analysts on average predict revenue of $24.31 billion, according to FactSet, with a pretty even split between the three segments Microsoft established for the 2016 fiscal year. Analysts predict $8.61 billion in sales for More Personal Computing, $8.36 billion for Productivity and Business Solutions, and $7.32 billion for Intelligent Cloud. Estimize contributors forecast $24.29 billion in revenue on average.
Stock movement: Microsoft has increased 13.5% in the past three months and 39% in the past year as of Wednesday, while the Dow Jones Industrial Average has gained 5.6% and 16.7% and the S&P 500 index
has gained 5.2% and 13.7% in those periods.
Analysts on average rate the stock the equivalent of a buy, with 25 of 35 analysts tracked by FactSet rating it favorably and only one placing a sell rating on the stock. The average price target as of Wednesday was $75.82, reflecting potential upside of 3.4% from Tuesday’s closing price.
Other things to look for
Analysts seem most interested in information on Microsoft’s Azure cloud-computing business, which competes with Amazon.com Inc.’s
Amazon Web Services, Alphabet Inc.’s
Google Cloud business and other such offerings. Microsoft does not break out Azure’s pure performance on its own, typically giving a growth rate but not raw numbers, though Canaccord analyst Richard Davis predicted Microsoft may break out Azure for the first time in this report.
“While we could get some good things from this—perhaps a breakout of Azure for example—in our experience you are more likely to get turbulence than a ripping stock price when any company shifts the revenue buckets around,” wrote Davis, who has price target of $68 and a hold rating on the stock, though he admits an upgrade was considered ahead of the results.
One area of Azure that will receive extra attention is an offering called Azure Stack, which allows for a hybrid-cloud model that keeps some information stored on private servers but still allows access to public cloud resources. Hybrid-cloud offerings such as Nutanix Inc.
have been growing in popularity, and expectations for Microsoft in that area are high.
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“We view [Azure Stack] as an incremental positive in the company being able to sustain key cloud business lines,” wrote RBC Capital Markets analysts, who have a $77 price target and outperform rating on the stock.
In the personal-computing category, IDC and Gartner reported continued declines for PC shipments in the second calendar quarter, and noted price increases tied to more expensive components. Microsoft’s PC revenue declined last quarter thanks to a big drop in revenue for its Surface line, and the company unveiled two new laptops in May, including one meant to challenge Google’s Chromebooks, which have been growing in popularity for the education market.
“The PC market continues to stabilize, despite pockets of macro weakness (Asia/Pacific and Latin America) and continued component shortages,” wrote Stifel analysts, who have a $73 price target and buy rating on the stock. “We are pleased to see a corporate PC replacement cycle to Windows 10 continue, although IDC notes that the primary reason the U.S. posted a smaller-than-expected decline (only down -0.4% Y/Y) was due to Chromebook growth.”
In cloud software, Microsoft is looking to bundle its security offerings and other offerings in Microsoft 365 bundles for businesses and customers, so results of that effort will be parsed intensely. This is also the second fiscal quarter to include full results from LinkedIn, which Microsoft acquired for more than $26 billion, and Microsoft could look to round out its offerings in cloud software with smaller deals or launches.
“Microsoft may need to invest in incremental products to round out its application portfolio of Dynamics products that are cloud-enabled, or do smaller tuck-in acquisitions to strengthen its enterprise apps portfolio, which outside of Office has failed to meaningfully grow organically in a highly competitive end market,” wrote Macquarie analysts, who have a $66 price target and neutral rating on the stock.