When Microsoft Corporation reports its third-quarter earnings Thursday, the software giant will hope to show that the gains it has made in cloud computing — in addition to offering cross-platform support — will offset the negative effect from the PC market's continued decline.
Signs of that decline are everywhere: Just this week, Intel said it will cut 11 percent of its global workforce as the continuing weakness in the market takes its toll on a company that has become over-reliant on sales of PCs. Microsoft, under CEO Satya Nadella, has been making strides to ensure that the same thing doesn't happen to it, and on Thursday the company is expected to report another strong quarter as it makes slow but steady gains.
The company has beaten Wall Street expectations for four consecutive quarters and could be in line to do something similar this week. The consensus among Wall Street analysts polled by Thomson Reuters is for Microsoft to report revenue of $22.1 billion, which would represent growth of 1.7 percent year-over-year, with earnings per share of 63 cents, up 3.9 percent. Microsoft's own revenue guidance for the quarter was in the range of $21.1 billion to $22.3 billion.
Microsoft shares have been growing steadily for the last eight months, and have risen 11.85 percent since Microsoft's last earnings report in January, compared with an 11.55 percent rise in the S&P 500.
Windows 10 is the fastest-selling version of Windows in Microsoft's history, with over 270 million computers using the new software as of earlier this month — an increase of 35 percent from the 200 million figure Microsoft announced in January. Despite this apparent rapid growth, research firm Gartner said last week that it is predicting that Windows revenue would decline this year by 7.5 percent to $13.5 billion in constant currency. The research firm said it sees weaker-than-expected Windows 10 sales this year, with a large portion of the 270 million people using Windows 10 today taking advantage of a free upgrade from Windows 8.
Where Microsoft is looking to continue its good performance is in the cloud, and one of the key aspects of its cloud offering is Office 365, its subscription-based, productivity suite of services, which Microsoft has successfully unbundled from Windows in order to take advantage of the huge popularity of iOS and Android. Office 365 grew 70 percent year-on-year in the final three months of 2015, and the company will be hoping to see similar growth for the first three months of 2016.
Another area where investors will want to see continued growth is in Microsoft's Azure enterprise cloud business, which saw huge 140 percent growth in the final three months of 2015. Azure is second only to Amazon Web Service in the enterprise cloud infrastructure market and with Nadella stressing a "cloud first, mobile first" strategy for the company, it is clear that success in the cloud will be key to Microsoft's continuing success.
“Feedback from resellers was generally positive, increasing our confidence that Microsoft can beat FQ3 (March) consensus expectations,” Pacific Crest Securities’ Brendan Barnicle wrote in an earnings preview note Sunday, according to MarketWatch. “In particular, resellers report strength in Office 365 and in-line momentum with Azure.”
In addition to the weakening PC market, Microsoft's potential revenue will be curtailed by tightening IT budgets, with a report from JP Morgan last week backing up similar reports from Gartner and IDC saying that IT spending would slow significantly in 2016.