Microsoft’s CEO Satya Nadella is finding a surprising fanbase among developers for his concerted push to forge partnerships and expand the cloud ecosystem. But getting investors excited largely depends on limiting the damage elsewhere.
In his third earnings report since taking the reins from longtime chief Steve Ballmer in February, Nadella will surely tout his progress in pushing Microsoft’s cloud business via a host of new deals and products.
That unit accounts for only about 5 percent of revenue.
Microsoft remains saddled with an aging software licensing business and a market-lagging mobile unit, highlighting the challenges Nadella faces in his effort to reignite overall growth. It’s a theme that will be on prominent display in the company’s report after the closing bell Thursday.
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“We are generally positive on the direction and efforts from the new CEO,” BGC Partners analyst Colin Gillis wrote in an Oct. 14 report. “But mention that the hard work of reorganizing the company and building traction in the mobile landscape lies ahead.”
Gillis has a hold rating and $49 stock price. The shares fell 1.1 percent on Wednesday to close at $44.38. They were higher in premarket trading Thursday. (For the latest price, click here.)
Analysts are expecting the Redmond, Washington-based software maker to report a 20 percent decline in fiscal first-quarter net income to $4.1 billion, or 50 cents a share, from $5.2 billion, or 62 cents, a year earlier, according to a Thomson Reuters survey. Revenue is expected to increase 19 percent to $22 billion. The drop in profit reflects, in part, a surge in sales and marketing costs.
Licensing sales in Microsoft’s consumer device business is declining, while its commercial licenses for flagship Windows products is hardly growing.
As the old model of having clients pay for software tied to individual machines shifts to the cloud, Microsoft is investing to spread adoption of its Office 365 Web-based tools and its Azure infrastructure, which competes with Amazon Web Services (AWS).
Earlier this week, Microsoft announced a partnership with Dell to bundle Azure on the hardware company’s servers. It also forged an alliance with red-hot start-up Docker, which provides tools for developers to build apps and distribute them anywhere.
“We view these announcements positively and expect Microsoft Azure to continue to gain traction as customers migrate to the cloud,” wrote Nomura Securities analyst Rick Sherlund, who recommends buying the shares and has a $50 price target. The enhancements will enable Microsoft “to compete better against AWS and Google,” he wrote.
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Microsoft partnered with Box last year, allowing users of the cloud collaboration software to work within Azure, and more recently Box said it will integrate with Office 365. Box CEO Aaron Levie, a regular critic of Microsoft in the Ballmer days, is now openly praising the company and Nadella.
In the fiscal fourth quarter, Microsoft’s commercial cloud sales jumped 147 percent. That growth put the business on pace for $4.4 billion in annual revenue, while total sales this fiscal year are expected to approach $100 billion.
Another focus for investors as the holidays approach will be Microsoft’s gaming business. The company’s computing and gaming hardware unit includes the Xbox and Surface Pro tablet, products that are increasingly competing against devices from Apple and Google.
Brad Reback, an analyst at Stifel, expects Microsoft to report 29 percent growth in that unit to $1.91 billion. The current quarter, which wraps in the holidays, will likely see 6.6 percent year-over-year expansion to $5 billion, Reback predicts.