On The Fly: What to watch in Microsoft earnings report

Microsoft (MSFT) is scheduled to report results of the fourth quarter of its fiscal year 2018 after the market close on July 19, with a conference call scheduled for 5:30 pm ET. What to watch for: 1. CLOUD: In the third quarter, Microsoft reported $7.9B in "Intelligent Cloud" segment revenue, up 17% year over year, or 15% in constant currency. Sales for "Azure" cloud products, Microsoft's most direct competitor to cloud leader Amazon (AMZN) Web Services, increased 93%, or 89% in constant currency. In his preview of Microsoft's report, Jefferies analyst John DiFucci said he expects investors will focus on the continued transition to Office 365 in both the consumer and enterprise markets, along with other cloud businesses like Azure. The stock tends to react more to Azure growth, though, and he sees "no reason why this doesn't remain meaningful," he wrote. 2. GITHUB: On June 4, Microsoft announced an agreement to acquire GitHub, whose web-based hosting service for version control using git is mostly used for computer code, for $7.5B in Microsoft stock. Upon closing, which is expected by the end of the calendar year, Microsoft expects GitHub's financials to be reported as part of the Intelligent Cloud segment. Alphabet's (GOOGL) Google was also talking to GitHub about an acquisition, but in the end Microsoft (MSFT) won the auction, which "was not close," according to a report from CNBC. After the deal was announced, Piper Jaffray analyst Alex Zukin called the acquisition "extremely strategic," saying it positions the tech giant favorably in the workflow for creating the next generation of applications. The analyst also sees the potential for meaningful synergies both within the Intelligent Cloud segment as well as longer-term synergies with the PBP segment. He was "highly positive" on the transaction and reiterated an Overweight rating on Microsoft on June 5. 3. PC: In the third quarter, Microsoft reported "More Personal Computing" revenue was up 13%, or 11% in constant currency, to $9.9B, noting that Windows OEM revenue increased 4%. On July 12, Gartner reported that worldwide PC shipments totaled 62.1M units in the second quarter of 2018, a 1.4% increase from the second quarter of 2017. This is the first quarter of year-over-year global PC shipment growth since the first quarter of 2012, the market researcher noted. Given the Gartner data on PC unit sales, DiFucci sees a possibility that Microsoft could exceed expectations meaningfully in the quarter, especially in its More Personal Computing business segment. He believes the Windows business has fueled the growth in cash flow that the company has enjoyed the last two years after free cash flow being relatively flat for 6 years and he estimates that Windows accounts for more than a third of Microsoft's profit, he told investors in his earnings preview note.