Microsoft (NASDAQ:MSFT) has been firing on all cylinders recently -- and investors are rewarding the software giant for it. Its shares have soared 44% in the past 12 months and are up 9% year to date. The stock's gain follows a strong 2017 and continued momentum so far this year. But with Microsoft stock performing this well, you can bet expectations are high going into the company's next earnings report.

Microsoft will report its results for its third quarter of fiscal 2018 on April 26. Ahead of the earnings report, here's an overview of what to look for.

Microsoft executive discusses the power of Microsoft Azure

Image source: Microsoft.

Overall expectations

Consistent with Microsoft's recent performance, investors expect strong revenue and earnings-per-share growth in Q3.


Q3 2018

Q3 2017

Implied Change (YOY)

Non-GAAP Revenue

$25.77 billion

$23.56 billion






Data source: Yahoo! Finance. 

It's no surprise analysts are modeling for strong growth from Microsoft. The company has been growing rapidly recently, with first-quarter revenue crushing analyst estimates by more than $1 billion, rising 12% year over year, and second-quarter revenue also rising 12%.

Commercial cloud revenue

Microsoft's growth has been helped by surging commercial cloud revenue, which climbed 56% year over year in Q2 to $5.3 billion. At $5.3 billion, commercial cloud revenue accounted for a meaningful 18% of revenue.

Commercial cloud is expected to continue growing sharply in 2018 -- not just in terms of revenue but also when it comes to profitability. Microsoft said in its second-quarter earnings call that it expects commercial cloud gross margin to improve year over year in Q3, driven by margin improvement in Azure -- Microsoft's enterprise cloud platform.


Speaking of Azure, this is one service investors will want to keep an eye on. Azure revenue soared 98% year over year in Q2 -- a notable acceleration from 90% year-over-year growth in Q1. This growth helped boost earnings meaningfully, as Microsoft said that even though it saw improved gross margin in each of its cloud services during Q2, Azure saw the most significant gross margin improvement.

One specific aspect to check on with Azure will be the growth in Azure Premium Services revenue, which increased by a triple-digit percentage on a year-over-year basis for the 14th quarter in a row in Q2. As one aspect of Azure that management cites for Azure's rapidly improving gross margin, investors should hope this trend persists in Q3.

Office 365

Another key area to look over will be Office 365. Ever since Microsoft began transitioning Microsoft to the cloud, it has been a huge hit with customers. Office 365 commercial revenue was up 41% year over year in Q2, driven by install-based growth and higher average revenue per user.

Meanwhile, Microsoft said the number of Office 365 consumer subscriptions increased 17% to 29.2 million, helping total Office consumer revenue rise 12% year over year.

For Microsoft to live up to its higher stock price, investors should look for similar trends from these key growth catalysts in Q3.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.