Microsoft Corporation Earnings Preview: In-Line Results Expected

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Microsoft is scheduled to release its next earnings report on Thursday after closing bell. Like Google, this will be the first time Microsoft reports under its new reporting structure. Consensus estimates suggest that the software giant will post earnings of 58 cents per share on $21 billion in revenue for its first fiscal quarter of 2016.

Microsoft earnings expected to be in line

Nomura analyst Frederick Grieb and his team believe there won’t really be any surprises in Microsoft’s report. In addition to this being the first report under the new reporting structure, this will be the first quarter in which there will be revenue deferrals from Windows 10, as the new version of the operating system came out in late July.

The Nomura team noted that data on PC shipments were about in line with their expectations and that customers are continuing the migration to Office 365.

PC shipments as expected

Data from Gartner indicated a 7.7% decline in PC shipments for the third quarter, which was in line with Grieb and his team, who were expecting a decline in the mid- to high-single digits. They estimate that Windows revenues from PC manufacturers fell 15% year over year in the September quarter, based on the percentage of PC shipment decline and declines in average selling prices as the mix shifts over to non-premium Windows versions.

Microsoft said earlier this month that as of Oct. 16, Windows 10 had been installed on 110 million devices. The Nomura team noted that while it appears as if adoption is going quickly, Microsoft did offer free upgrades to some Windows 7 and Windows 8 users, which may be why the number got so high so quickly. These free upgrades obviously won’t have much of an impact on the company’s September quarter revenues.

A focus on Microsoft’s new segments and cloud progress

The analysts expect most of Wall Street to be focusing on Microsoft’s new segments and its progress in transitioning into a cloud company. Investors will likely be looking closely at the new reporting segments, which the Nomura team expects to provide more transparency on how Microsoft Office and the Server and Tools business, which includes Azure, are progressing. The new structure should also clear up questions about these segments’ profitability.

They see the Commercial Cloud business as being one of Microsoft’s most important segments right now as it works on transitioning Office users to the subscription-based version of Office, Office 365. Another area of focus will be operating expenditures, and they expect Microsoft management to reiterate their previously provided guidance on this metric for fiscal 2016. However, they also noted that management has been pretty conservative on guidance in this area historically.

Further, they expect investors will especially be interested in operating expenditures in the wake of the massive write-down of Nokia’s devices business in July. Microsoft wrote down $7.6 billion for the business, which was more than what it paid for the business in 2014.

The Nomura team continues to rate Microsoft as a Buy with a $55 per share price target heading into Thursday’s earnings report. As of this writing, shares of Microsoft were down 0.12% at $47.68 per share in late afternoon trading.

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