Microsoft (NASDAQ:MSFT) will turn in its fiscal-third-quarter earnings report on Thursday. Analysts expect the Windows maker to earn an adjusted $0.64 per share on revenue of around $22.1 billion. If accurate, both figures would be little changed from the same period last year.
But the last 12 months have brought some fairly dramatic shifts to Microsoft's business. Generally, that's been a great thing for shareholders: Microsoft stock is up better than 35% since last April, outperforming the broader market. Can that outperformance continue? Thursday's report could bring a number of interesting data points, but Microsoft investors should keep a close eye on a few factors in particular.
Surging demand for Microsoft's enterprise cloud services
Microsoft's business is increasingly driven by its cloud computing services. Office 365, Dynamics CRM, and Azure are among its most compelling offerings, and represent perhaps the most significant, durable long-term opportunities for Microsoft's business. In recent quarters, Microsoft has offered up data on all three products individually, reporting the number of subscribers, seats, and revenue growth.
But the one metric investors should watch most closely is Microsoft's commercial cloud annualized revenue run rate. It's a figure that represents the amount of cloud revenue Microsoft's enterprise services could generate in a single year if demand were to remain constant. Last quarter, it totaled more than $9.4 billion, up from about $1 billion in the first quarter of its 2013 fiscal year.
Management remains confident that the figure will continue to grow, and expects it to top $20 billion in its 2018 fiscal year. If Microsoft is going to hit that guidance, it will need to show growth this quarter. Breaking above $10 billion would be notable -- its annualized commercial cloud revenue run rate totaled just $6.3 billion during last year's fiscal third quarter.
Closing in on 300 million machines
Late last month, during its Build 2016 keynote conference, Microsoft announced that its latest operating system, Windows 10, was running on 270 million machines. That's up from about 200 million devices at the beginning of the year. Microsoft could offer investors an additional update on Thursday, or it may simply reiterate that figure. At any rate, it represents impressive growth, and makes it Microsoft's fastest-growing operating system ever.
Still, Microsoft has a long way to go to hit its target to have Windows 10 running on 1 billion devices by 2018. Last quarter, it highlighted the steps it was taking to achieve its goals, pushing enterprise customers to upgrade. Look for Microsoft to quantify enterprise interest in its operating system on Thursday, and perhaps provide more insight into the first major Windows 10 update coming this summer.
How is Windows benefiting the rest of Microsoft's business?
Microsoft's ability to sell Windows licenses has come under pressure in recent years. It continues to offer Windows 10 as a free upgrade to consumers, in contrast to the somewhat hefty license fees it typically charged in the past. As a consequence, Windows revenue has been weak in recent quarters -- in its fiscal third quarter last year, Windows OEM revenue contracted a massive 22% on an annual basis.
Other portions of Microsoft's business have risen to help offset Windows' decline, some of which have benefited directly from the Windows 10 platform. Last year, for the first time, Microsoft's search engine, Bing, achieved profitability thanks to Windows 10, and consumer Office 365 subscriptions continue to rise, hitting 20.6 million last quarter. On the enterprise side, Microsoft has announced additional services that will integrate directly into Windows 10. In October, it unveiled Windows Defender Advanced Threat Protection, a cybersecurity service that could be attractive to enterprise customers and help generate additional revenue.
Look for Microsoft to provide additional color as to how Windows 10 adoption is benefiting the rest of its products and how it sees those trends going forward.
Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.