On The Fly: What to watch in Microsoft earnings report

Microsoft (MSFT) is scheduled to report results of the third quarter of its fiscal year 2018 after the market close on April 26, with a conference call scheduled for 5:30 pm ET. What to watch for: 1. CLOUD: In the second quarter, Microsoft reported $7.8B in "Intelligent Cloud" segment revenue, up 15% year over year. Sales for "Azure" cloud products, Microsoft's most direct competitor to cloud leader Amazon (AMZN) Web Services, increased 98%. About a week ago, KeyBanc analyst Brent Bracelin said Microsoft remains one of his favorite cloud platforms to own in software. The analyst argues it is well positioned for "another solid quarter of upside," driven by a continuation of robust secular tailwinds in cloud and digital that should be augmented by a cyclical refresh cycle. Further, Bracelin sees its growth trajectory inflecting higher this year as the cloud segment tops a $23B run-rate and margins further expand on operating efficiency at over $100B revenue scale. The analyst reiterated an Overweight rating and $110 price target on Microsoft shares. Meanwhile, on April 12, Wells Fargo analyst Phil Winslow said he believes Microsoft can return to mid-teens EPS and free cash flow growth as the headwinds from a declining PC market in recent years and the transition to the cloud continue to abate relative to the increase in recurring subscription revenue from Azure and Office 365. 2. PC: In the second quarter, Microsoft reported "More Personal Computing" revenue was up 2% to $12.2B, noting that Windows OEM revenue increased 4%. On April 11, Gartner reported that worldwide PC shipments totaled 61.7M units in first three months of the year, a 1.4% decline from Q1 of 2017 and a 14th consecutive quarter of decline. However, market research peer IDC estimates that worldwide shipments of traditional PCs totaled 60.4M units and recorded flat year-on-year growth in the first quarter of 2018. "The results exceeded the earlier forecast of a 1.5% decline and marks the third consecutive quarter where traditional PC shipment volume has hovered around flat growth year on year," IDC stated. Business uptake of Microsoft's Windows 10 systems appear to be steadily ongoing, IDC added. After those reports, Credit Suisse analyst Michael Nemeroff noted that both IDC and Gartner called out strength in the commercial market in their reports. The analyst pointed out that IDC highlighted that PC shipments outperformed in Q1, while Gartner noted that Q1 commercial PC shipments were strong, largely driven by Windows 10 migrations that were previously postponed during 2017. Nemeroff believes these data are supportive of his bullish thesis on Microsoft shares, as there is a high correlation to enterprises upgrading their productivity suite platform when upgrading their OS environments, or replacing PCs. 3. GAMING: Recently, UBS analyst Jennifer Lowe said Microsoft's gaming business is evolving beyond Xbox consoles and across multiple cloud-connected devices with a greater emphasis on repeatable revenue subscriptions. The analyst said its gaming segment is aligning with other Microsoft core franchises and is helping Microsoft's growth story. Lowe reiterated her Buy rating and $110 price target on Microsoft shares.