Microsoft (MSFT) is scheduled to report results of the second quarter of its fiscal year 2019 after the market close on Wednesday, January 30, with a conference call scheduled for 5:30 pm ET. What to watch for:
1. CLOUD PERFORMANCE: In its fiscal first quarter, Microsoft reported $8.6B in "Intelligent Cloud" segment revenue, up 24% year over year. Sales for "Azure" cloud products increased 76%. CFO Amy Hood said at that time that the company's "record results for Q1 reflect our commitment to long-term strategic investments and consistent execution to drive revenue growth and operating margin expansion. We see continued demand for our cloud offerings, reflected in our commercial cloud revenue of $8.5 billion, up 47% year over year." Morgan Stanley analyst Keith Weiss said earlier this month that the firm's survey of 100 U.S. and European CIOs points to "strong" 2019 IT budget growth expectations of 4.7% year-over-year, which he notes is relatively in line with the 4.9% budget growth expected for 2018. While investors' concerns about the durability of software growth broadly, and the durability of the more cyclical aspects of the Microsoft portfolio, are rising, the CIO survey gives Weiss confidence that the strong secular demand trends driving Microsoft's top-line should trump potential cyclical headwinds, he told investors. Weiss keeps an Overweight rating on Microsoft with a $130 price target.
2. CLOUD THREAT?: In October, after IBM (IBM) announced a deal to acquire Red Hat (RHT), Oppenheimer analyst Timothy Horan noted that those two have lagged leaders such as Microsoft, Amazon (AMZN), and Google (GOOG, GOOGL) in the cloud. By merging, they are trying to improve their cloud position and Horan sees them looking to use the disruptive Container/Kubernetes to create a new hybrid cloud platform. Given how far behind they are in infrastructure, the analyst believes they may look to partner much more with Google, which is a threat to Microsoft more so than AWS. While Horan thinks the deal does open up an opportunity for a combined IBM/Red Hat to enter the market with a new service, they still have a long way to go before they can compete with Microsoft and Amazon in cloud, he stated. At the time, Morgan Stanley's Weiss said the announcement reinforced both his confidence in the emergence of Hybrid Cloud architectures and the strength of IT spending into 2019. Red Hat has been Microsoft's primary competitor within server operating systems, and has generally been taking share, said Weiss, who thinks the longer-term opportunity or threat for Microsoft hinges on the ability of IBM to execute well and maintain the open source enthusiasm around the Red Hat distributions.
3. THROWING IN TOWEL ON 'WINDOWS PHONE': On January 18, CNBC reported that Microsoft is recommending that anyone who still uses its Windows 10 mobile platform, previously known as Windows Phone, should change to an iPhone (AAPL) or an Android (GOOGL) device. The company said that on December 10, 2019, it will no longer send "new security updates, non-security hotfixes, free assisted support options, or technical content updates from Microsoft for free," the report noted. "Microsoft's mission statement to empower every person and every organization on the planet to achieve more, compels us to support our Mobile apps on those platforms and devices," CNBC quoted the company as having said.
