Microsoft (MSFT) is scheduled to report results of the first quarter of its fiscal year 2018 after the market close on October 26, with a conference call scheduled for 5:30 pm ET. What to watch for: 1. CLOUD: In the fourth quarter, Microsoft reported $7.4B in “Intelligent Cloud” segment revenue, up 11% year over year. Sales for “Azure” cloud products, Microsoft’s most direct competitor to cloud leader Amazon (AMZN) Web Services, increased 97%. While Microsoft and Amazon duke it out to be the number one U.S. cloud company, with Google (GOOG) often mentioned as the third leading domestic competitor, DigiTimes reported on October 17 that Alibaba (BABA) president Simon Hu said Alibaba Cloud plans to become one of the top two public cloud computing service providers in the world within two to three years. The service, which currently is the third largest provider in the space, aims to pass Azure to compete for the top spot with AWS, according to the report. 2. PC: In the fourth quarter, Microsoft reported “More Personal Computing” revenue fell 2% compared to last year to $8.8B, driven primarily by lower phone revenue. Windows OEM revenue increased 1%, slightly ahead of the overall PC market. On October 3, Gartner forecast that worldwide IT spending is projected to total $3.7T in 2018, an increase of 4.3% from 2017 estimated spending of $3.5T. The devices segment is expected to exhibit growth for the first time in two years with an increase of 5.3% in 2017 and 5% in 2018, said Gartner, which cited expectations for increased average selling prices for premium phones along with an underlying demand for PCs from businesses replacing their machines with Windows 10 PCs is driving the growth in this segment. On October 11, Credit Suisse analyst Michael Nemeroff noted that quarterly PC shipment data called out strength in Business PC demand driven by Windows 10 upgrades, consistent with the proprietary data he previously published that indicated 48% of enterprises plan to upgrade to Windows 10 within the next 12-24 months. The analyst expects continued strong growth in Office 365 Commercial products over the next few years, but over time he estimates that Windows-related revenue will decline as a percent of Microsoft’s business. 3. CANACCORD, KEYBANC BULLISH: On October 5, Canaccord upgraded Microsoft to Buy from Hold, saying that investors are underestimating the company’s growth drivers. Microsoft could generate “explosive” growth by expanding its competitive video game business, also known as e-sports, wrote Canaccord analyst Richard Davis. Meanwhile, its marketing business is “emerging” and could become similar to that of Salesforce (CRM), Davis believes. Over the next five years, Microsoft’s revenue growth should accelerate as its higher growth products begin to account for a greater percentage of its sales, Davis added. Earlier this week, KeyBanc analyst Brent Bracelin told investors he anticipates a “strong start” to 2018 for Microsoft led by the continuation of robust Azure and Office 365 adoption trends. The analyst reiterated an Overweight rating, citing the company’s multiyear cloud and AI transformation, which he believes could expand free cash flow to $6 per share within four years.
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