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Will Microsoft's Cloud Computing Juice Its Earnings Results?

By Danny Vena - Jan 28, 2020 at 11:45AM

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Azure has been a key contributor to the tech giant's recent growth, and that trend will likely continue.

While Microsoft (MSFT 1.33%) is best known for its operating system and software products, the company's resurgence in recent years has been largely attributed to its successful foray into cloud computing. This success helped push Microsoft's market cap above $1 trillion in 2019 while driving its stock up by more than 55% last year, easily outpacing the 29% gains of the S&P 500.

The company's cloud computing segment will likely be in the limelight once again, and many market watchers expect the segment's sterling growth to continue when Microsoft reports the financial results of its fiscal 2020 second quarter after the market close on Wednesday, Jan. 29.

The Microsoft logo near the entrance to the company's headquarters

Image source: Microsoft.

Head in the clouds

It's been just a decade since Microsoft introduced its Azure Cloud in February 2010, and the platform's ascent has been nothing short of phenomenal. Microsoft quickly became the second-largest cloud provider, behind just Amazon Web Services (AWS), and continues to grow at a faster rate.

In its fiscal first quarter, Microsoft said its commercial cloud generated revenue of $11.6 billion, up 36% year over year. The company's intelligent cloud segment grew to $10.8 billion, up 27%, while Azure grew a more impressive 59% compared to the prior-year quarter.

While the cloud is currently part of a trifecta of Microsoft businesses, there are those on Wall Street who think this is just the beginning. Late last year, Stifel Nicolaus analyst Brad Reback pointed out that the transition to the cloud is still in the early stages and notes that Azure already has a run rate of $17 billion. With Microsoft's recent wins like the $10 billion JEDI contract, cloud computing could become its biggest revenue generator by 2023. 

Look for more strong gains from the cloud segment.

Not a one-trick pony

Another factor in Microsoft's strong growth has been the company's ability to generate recurring revenue from the sale of subscriptions to its suite of software products like Office. Microsoft's productivity and business processes segment has been a consistent performer, with revenue of $11.1 billion, up 13% year over year in the first quarter. This included revenue from Office commercial products and cloud services that climbed 13% year over year, while Office 365 commercial revenue climbed 25%.

Microsoft's more personal computing segment grew at a much slower rate, up just 4% year over year, but still generated revenue of $11.1 billion.

Another guidance beat?

Microsoft is forecasting total revenue in a range of $35.15 billion to $35.95 billion, which would represent year-over-year growth of about 9% at the midpoint of its guidance. This would represent a deceleration from the 14% growth the tech giant achieved last quarter. Analysts' consensus estimates are calling for revenue of $35.7 billion -- near the high end of management's guidance -- or growth of about 10%, while expecting earnings per share of $1.32, an increase of 20%.

It's important to note that Microsoft's management has historically been conservative with its guidance and has beaten its internal estimates for several consecutive quarters. Given that history, it wouldn't be much of a surprise if Microsoft were to exceed its own guidance yet again.

 

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