Microsoft earnings: What to watch

Microsoft Corp. (NASDAQ:MSFT) is scheduled to report fiscal fourth-quarter earnings after the market closes Thursday. The software giant's shares closed Wednesday at $73.86, an all-time high. Here's what to expect.

EARNINGS FORECAST: Analysts surveyed by S&P Global Market Intelligence expect Microsoft to report adjusted per-share earnings of 71 cents, up from 69 cents a year earlier. Adjusted results exclude items such as deferred revenue and restructuring charges. A year ago, the company reported net of 39 cents a share.

REVENUE FORECAST: Analysts expect Microsoft to post adjusted revenue of $24.29 billion, up from $22.64 billion a year earlier. The adjusted number reflects Windows 10 revenue deferrals.

WHAT TO WATCH:

-- CLOUDY CONDITIONS: Microsoft continues to ramp up its business of selling web-based, on-demand computing processing and storage. Stifel Nicolaus & Co. analyst Brad Reback estimated in a recent research note that Microsoft's Azure cloud-computing business grew about 87% in the quarter to $1.1 billion, continuing "to close the gap" with market pioneer and leader Amazon.com Inc. (NASDAQ:AMZN). In the fiscal third quarter, Azure revenue grew 93%. He credited Microsoft's "maturing product offering" as well as its ability to sell hybrid offerings that combine cloud services with software that runs in customers' own data centers. Microsoft's commercial-cloud run-rate -- the last month of sales of its Azure and Office 365 products, multiplied by 12 -- should hit $18 billion, up 49% year-over-year, Mr. Reback estimated.

-- DATA-CENTER SPENDING: To handle its growing cloud business, Microsoft needs to build costly data centers around the globe. The company, along with Amazon and Alphabet Inc.'s Google (NASDAQ:GOOGL), spent a combined $31.54 billion in 2016 in capital expenditures and capital leases, up 22% from 2015, according to company filings. That rate of spending is likely to continue as Microsoft works to keep pace with its rivals, in turn making it more costly for would-be competitors to catch up. Mr. Reback estimated Microsoft will post $3 billion in capital expenses in the quarter, bringing the company's fiscal year total to $8.9 billion. He expects the annual number to climb to $11.4 billion in the current fiscal year.

-- SURFACING SALES: Three months ago, the biggest blemish on Microsoft's results was a 26% decline in revenue from the company's Surface line of computers. At the time, Microsoft attributed the slide to older Surface computers in the market, as well as increased price competition. Since then, Microsoft has rolled out a new Surface laptop for the education market, and an update to its Surface Pro tablet-laptop hybrid device. Those products, though, became available toward the end of the quarter and aren't likely to have factored much into the company's top line.

-- SHRINKING WINDOWS: Sales of personal computers, the vast majority of which run Microsoft's Windows operating system, continue to decline. Last week, International Data Corp. reported world-wide PC shipments fell 3.3% in the second quarter, while Gartner Inc. estimated the drop at 4.3%. Since More Personal Computing, comprised largely of Windows revenue, remains Microsoft's largest segment, PC declines continue to dog the company's results. Morgan Stanley analyst Keith Weiss estimated in a research report that revenue for the segment slid 4.3% to $8.52 billion, as sales of Windows to computer makers fell 2% to $2.67 billion.

(END) Dow Jones Newswires

July 20, 2017 07:14 ET (11:14 GMT)