In the latest one-year period, shares of Microsoft (MSFT) - Get Report are up 21%. Microsoft will report second-quarter fiscal 2017 results after the close on Thursday. Analysts are looking for earnings of 79 cents per share on revenue of $25.28 billion.
Revenue declined 1.3% last year and is expected to be up about 2% this year to $94.2 billion. Revenue is being driven by Microsoft's Intelligent Cloud, or Azure, business. For the second quarter, the Intelligent Cloud should be up 7.6% to $6.8 billion.
Revenue for Microsoft's largest division, More Personal Computing, is expected to be down nearly 9% to $11.5 billion as the stagnant personal computing business continues to pressure the division. The productivity and business process business should be up 3% to $6.9 billion.
Analysts are modeling operating margins of 30%, at the high end of the guidance range of 27.6% to 31.0%.
None of the estimates include the acquisition of LinkedIn. Microsoft completed the LinkedIn merger on Dec. 8.
With the shift to the cloud, Microsoft's margins have been under pressure. The company had a 74% gross margin in fiscal 2013, without the cloud business. Now, overall margins are in the mid-60s because the commercial cloud has gross margins in the high 40s. In the first quarter, Azure grew revenue by 116%.
Microsoft's Office 365 business continues to grow aggressively, but faces difficult comparisons. In the first quarter, Office 365 subscribers were up 31.9% to 24 million. Last year, in the second quarter, Office subscribers were up 124%. Office 365 commercial seats grew 40% (vs. 59% last year) as large enterprise customers convert to Office as a subscription in the cloud. Office commercial product revenue was up 5% in the first quarter.
Windows 10 Pro (OEM version) was flat in the first quarter and should start gain traction as large customers begin to adopt the software. Last year, in the second quarter, the business was down 6%.
According to news reports, Microsoft will layoff 700 people after the company reports earnings. The layoffs are part of a previously announced plan to cut 2,850 jobs by June. The company has already laid off more than 25,000 workers, mostly from the Nokia smartphone business it acquired in 2013.
Analysts think the company will earn $2.97 per share in fiscal 2017 and $3.27 next year. Revenue is forecast to rise 6.3% to $99.7 billion from 2017 to 2018 as commercial customers continue to adopt Windows 10 and the cloud services.
For Microsoft shares to move materially higher, I think the company has to get cloud margins closer to the corporate average. That said, I think Microsoft has some decent momentum and should move towards $80 (or 25 times EPS of $3.27) as investors gain more confidence in the company's margins going forward.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.