The Microsoft earnings for Q2 are expected after the market close today (Monday).
Investors will be looking to see if Microsoft Corp. (Nasdaq: MSFT) can maintain the momentum from its Q1 earnings. In its previous earnings, the Redmond, Wash.-based tech giant beat estimates on both the top and bottom lines.
Last year Microsoft looked stronger than it has in more than a decade. Much of the credit for the company's revival goes to new CEO Satya Nadella, who took the helm on Feb. 4.
The Q2 MSFT earnings will tell us if Nadella's strategies are working as intended. They'll also give us a hint of what we can expect in 2015.
Q2 Microsoft Earnings: The Overview
The numbers: According to Yahoo! Finance, analysts are looking for earnings per share (EPS) of $0.71, down from $0.78 a year ago. Microsoft's EPS has declined in seven of the past 10 quarters. The revenue forecast is for $26.32 billion, up from $24.52 billion in the year-ago quarter.
The last quarter: Microsoft's EPS of $0.54 beat expectations by $0.05. If you back out $0.11 of restructuring charges, MSFT's Q1 earnings would have been higher year over year as well. Revenue was $23.2 billion, beating expectations for $22 billion. It was an impressive 24.8% year-over-year increase over the $18.53 billion.
The stock: MSFT stock was down as much as 7.8% and up as much 7%, but ended the quarter almost exactly where it started. Like most stocks, MSFT felt the effects of a volatile quarter in the markets. But Microsoft stock ended the year with a gain of 25%. MSFT stock closed at $46.24 on Friday. The company raised its quarterly dividend to $0.31 from $0.28 Sept. 16. With a payout ratio of just 44% and the prospect for rising earnings in 2015, we could see another dividend hike this year.
Now here's what will matter most in the MSFT Q2 earnings:
What to Watch in the Q2 Microsoft Earnings
Keys to the quarter: With Nadella's one-year anniversary so close, the Microsoft Q2 earnings will get scrutinized even more closely than usual.
Microsoft should see a benefit from a stabilizing PC market. While PC sales were flat in the quarter, that's better than the 4% to 5% decline that had been expected. And more PC sales means more sales of the Windows operating system. Microsoft helped this trend along by ending support for Windows XP in April. That encouraged a wave of PC buying among consumers and businesses alike. And it happened despite disappointment with Windows 8.
Investors should also keep an eye on Office 360 subscriptions. Microsoft has offered incentives for customers to pay for an annual subscription instead of buying the software outright. Over the past two years, Office 360 subscriptions have increased by 1 million per quarter. Microsoft needs that growth to continue so it can build up this revenue stream.
Another area to watch in the Q2 MSFT earnings is the cloud -- a Nadella priority. It's only 5% of Microsoft's business now, but that makes it a potential engine for major growth. Microsoft faces stiff competition from Amazon.com Inc. (Nasdaq: AMZN) in particular, but making headway here is vital for Microsoft.
One segment that could disappoint is the Nokia phone business former CEO Steve Ballmer bought for $7.2 billion. The Lumia smartphones, which run Windows, have struggled in a market dominated by Google Inc.'s (Nasdaq: GOOG, GOOGL) Android and Apple Inc.'s (Nasdaq: AAPL) iPhone.
We'll also learn if Microsoft's big push in tablets is paying off. The Surface Pro 3 is thought to have done well over the holidays. Strong sales would vindicate the huge marketing effort. The earlier versions of the Surface tablet were big money losers, but Microsoft is known for its persistence. The Surface Pro 3 won't displace the iPad any time soon, but rising sales would be a step in the right direction.
And finally, a note on last week's big announcements. The main headline was that Windows 10, the latest version of Microsoft's iconic operating system, will be a free upgrade for those using Windows 7 and up. How this will affect earnings going forward isn't clear. Microsoft could turn Windows into a subscription or offer cloud-based features for a fee. One immediate benefit, however, will be to get most Windows users on the same version. That's a big deal for developers, who don't like the extra work of having to make apps backward-compatible with older versions. And it's a move that should help Microsoft in mobile, where market share remains anemic. Apps written for Windows PCs will be easier to adapt to smartphones and tablets. The Windows mobile ecosystem needs all the help it can get.
Microsoft Outlook for 2015: Much of what Nadella did last year was intended to shake off Microsoft's decade-long malaise. Now the tech giant is seeking growth in several new areas, including the cloud and wearable tech. Here's everything Microsoft has at stake in 2015...
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.