Microsoft will report its latest quarterly results on Wednesday, and analysts are expecting that its cloud business will continue to grow.
Since Satya Nadella became Microsoft CEO in Feb, 2014, the technology giant’s stock has risen over 145%, due partly to its push into cloud computing, a business in which business customers buy computing resources on-demand from Microsoft data centers.
Although Microsoft doesn’t reveal specific revenue numbers for its Azure cloud computing unit, it said last quarter that its overall cloud business—which also includes Office 365 work software and other services—hit an important milestone of more than $20 billion in sales on an annualized basis. The company determined its run rate by multiplying the sales of its cloud unit during its best month in the fiscal first quarter by 12.
Here’s a few things to look for when Microsoft reports its fiscal second quarter earnings, for the three-month period ending Dec. 31, on Wednesday afternoon:
There will be cloud
UBS analyst Jennifer Swanson Lowe said in a research note that she expects Microsoft’s overall cloud unit to continue growing and “more than offset” shrinking sales in older products like its Windows Server software. Essentially, more companies are buying software services in a pay-as-you-go model instead of the traditional software licensing model.
J.P. Morgan analysts polled a number of unnamed Microsoft (MSFT) partners—mostly resellers of its products—that responded that Microsoft’s cloud business is becoming as well-regarded as Amazon Web Services (AMZN) in terms technical capabilities. This is significant because it shows that AWS, considered by analysts to be the gold standard of cloud computing, is getting increased competition.
“I hardly ever hear about Google apps or AWS anymore,” said an unnamed partner that was quoted in the firm’s analyst note. “I used to have customers wanting to know how MS (Microsoft) is better. It seems now it is a given that MS is better.”
Will Microsoft be affected by the big tax changes?
Microsoft, like many other big tech firms, will get a bigger tax bill when it brings its overseas cash back to the U.S. Because it will need to pay taxes on that money before it gets a lower future tax rate on its domestic profits
UBS expects that Microsoft will pay a 15.5% repatriation tax on the $132 billion overseas over the next eight years, which will “complicate” Microsoft’s future guidance.
How about gaming?
Besides its cloud computing business, Microsoft CEO Satya Nadella has also emphasized that his company’s Xbox video game unit will become one of its biggest businesses. But as gaming publication Polygon reported this week, Microsoft trails competitors like Sony and Nintendo when it comes to hotly anticipated “exclusive” games that are only available on Xbox. If Xbox doesn’t have as many in-demand games compared to other consoles, it’s less likely gamers will want to buy the Xbox console. To address the gaming gap, Microsoft is rumored to be interested in buying gaming giant Electronic Arts or the gaming publisher and distributor Valve.
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A Microsoft spokesperson told Coins2Day that it does “not comment on rumors or speculation.” But an analyst may ask Microsoft to explain its gaming strategy during its call with analysts and how it plans to get more hot titles to the Xbox.
Canaccord Genuity analysts said in a research note that Microsoft should push more heavily into the burgeoning e-sports category, in which video gamers play in live competitions, and that “acquisitions would be super helpful to jump starting growth here.”
