On The Fly: What to watch in Microsoft earnings report

Microsoft (MSFT) is scheduled to report results of its third fiscal quarter after the market close on April 27, with a conference call scheduled for 5:30 pm ET. What to watch for: 1. CLOUD, OFFICE 365: In the second quarter, Microsoft reported $6.9B in "Intelligent Cloud" segment revenue, up 10% year over year. Notably, sales for "Azure" cloud products, Microsoft's most direct competitor to cloud leader Amazon (AMZN) Web Services, increased 93%, or 95% in constant currency, with Azure compute usage more than doubling year-over-year. Office 365 commercial products, key to Microsoft's transition of its long-standing productivity platform to a subscription model, grew 47%, or 49% in constant currency. The company has forecast Q3 cloud segment revenue of $6.45B-$6.65B and productivity segment revenue of $7.65B-$7.85B. 2. LINKEDIN: Microsoft's acquisition of business-oriented social network LinkedIn successfully closed in early December of last year. This quarter marks the second quarter, but first full quarter, in which LinkedIn will be included in management guidance, noted Jefferies analyst John DiFucci. On April 24, Microsoft announced new integrations between its "Dynamics 365" CRM and ERP business software and LinkedIn, which it said "will help salespeople deliver better outcomes using insights from LinkedIn Sales Navigator and LinkedIn's 500M professionals." According to Reuters, the improvements to Microsoft's Dynamics 365 are a challenge to market leader Salesforce (CRM) and are the first major product initiative to spring from the former's acquisition of LinkedIn. 3. BULL/BEAR VIEWS: Just this morning, Credit Suisse analyst Michael Nemeroff initiated coverage of Microsoft with an Outperform rating and $80 price target, touting the "significant earnings power potential" he believes can be unlocked from strong commercial cloud growth and higher cloud gross margins over time. The enterprise move to the cloud could last for "decades" and he expects Azure's margins to steadily improve as Microsoft at least maintains, if not gains, market share in the IaaS/PaaS markets, he tells investors. On the other side of the spectrum, Jefferies' DiFucci is much more bearish on Microsoft. He believes consensus Q3 revenue estimates, which are 2% above typical sequential seasonality, "appear slightly bullish, though Street estimates for Q4 seem "more reasonable." DiFucci, who expect investors and management will focus on the continued transition to Office 365 along with other cloud businesses, such as Azure, keeps an Underperform rating and $45 price target on Microsoft shares.