Microsoft (MSFT, Financial) will be reporting its second-quarter 2017 earnings on Jan. 26 after the market close. Wall Street is expecting the company to post earnings per share of 79 cents with revenues of $25.28 billion.
Microsoft has been buoyed by the success of its cloud-based solutions that include Office 365, Microsoft Azure and Dynamics 365. The transition – from Windows-based revenue dominating the landscape to the segment merely becoming a small part of the company’s revenue stream – is unmistakable. That was the whole idea behind Microsoft’s “cloud first mobile first” approach.
During the first quarter of 2017 Microsoft’s revenue grew by 6% in the Productivity and Business Processes segment that holds Office 365 revenues while Intelligent Cloud, which includes Microsoft Azure revenues, grew by 8%. More Personal Computing, which accounts for Windows-based revenues and devices, declined by 2%, resulting in near-flat growth for the quarter compared to the prior period.
In 2016, Microsoft’s revenue declined sharply because of More Personal Computing, and the first quarter of 2017 was a clear enough indication that those days might be over. It was also a sign that new revenue streams bolstered by cloud solutions are now in a position to offset the losses from legacy business streams, especially Windows revenues.
Even now, More Personal computing accounts for a bulk of Microsoft’s revenue and could have a huge impact on its overall revenue for the quarter depending on where PC sales were headed.
But that would be a short-term event because, with each passing quarter, Microsoft is slowly weaning itself from the addictive grip of Windows-based income.
In the first quarter of the current fiscal Microsoft's annualized commercial cloud revenue exceeded $13 billion, and the company is targeting $20 billion in annual cloud-based revenues by 2018, or $5 billion per quarter. When that happens, it’s a sign that Windows can stop holding the fort alone and start depending on equal or greater contributions from the cloud parts of its business.
Microsoft Azure has been growing at more than a 100% rate for the past five quarters, and Office 365 is growing at strong double-digit rates. Considering the way the cloud industry has been expanding, Microsoft should at least continue significant double-digit growth momentum in both these divisions.
Revenues have declined for two years, but this year started out flat. The second quarter will now – hopefully – demonstrate that CEO Satya Nadella truly has turned the ship around and started it on its new growth journey. The market has been able to see this transition coming a mile away, pushing the stock price by more than 26% in the last 12 months. Microsoft is trading close to its 52-week high, and a good earnings result will allow the stock price to continue its upward momentum.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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