- Revenue declines continue to plague the Personal Computing segment.
- Growth in other segments is relatively flat, signifying heavy declines in traditional segments.
- As such, 1Q-17 will be a crucial quarter for Microsoft to show significant traction.
Microsoft Corporation (NASDAQ:MSFT) is a company in transition. Thankfully, the current leadership understood that the situation was grave enough to undertake sweeping changes, cutting their mobile hardware business to size, pushing Windows revenue streams to the background and bringing business management software applications, Office productivity suite and cloud-based business units to the front.
Microsoft mixed and matched its growing business lines with declining ones when the company changed its reporting structure last year. As new revenue streams kept replacing old ones, overall numbers reported by Microsoft didn't make for a great reading, and investors should be prepared to expect that trend to continue for a few more quarters.
Microsoft’s annual revenue declined from $93.58 billion in 2015 to $85.32 in 2016, a drop of 8.83%. The drop in revenue can be directly attributed to the More Personal Computing segment that houses their Windows-based earnings.
Change In Reporting Structure
It might be a bit of a surprise to see Productivity and Business Process and Intelligent Cloud segments show less than enthusiastic growth in the last four quarters as Office 365 and Cloud revenues have been growing at a breathtaking speed in the last 24 months. The reason was Microsoft has mixed growing business lines long with legacy business lines across the board. So as most of the new revenue streams have been replacing the old ones, even stellar growth in cloud and productivity has resulted in flat growth for the Productivity segment and a less than 6% growth for the Intelligent Cloud segment.
But things have gradually been changing from the second half of last year and, in all likelihood, that growth could accelerate in the coming quarters. The most important metrics to watch now are growth in these two segments, Productivity and Business Process as well as Intelligent Cloud. Microsoft reports first quarter 2017 results on October 20th after the market close.
The reason those two segments are important is because revenue decline from Windows OEM in the short to medium term is a highly likely event. The world has quickly moved towards a mobile device-based environment, and PC sales have now declined for four consecutive years and are on the way to make it five in a row this year. According to Gartner, PC shipments declined 5.7% during the third quarter, making it the seventh consecutive quarter of PC shipment decline, the longest in history.
This trend is not going to change. Though nobody expects PC sales to go down to zero, it's clear that it will never get back to its old glory days. At best we can expect stable sales in the future, but stable sales growth might prove elusive as mobile devices are getting more and more powerful each year. That trend will continue to be a huge headwind for Microsoft, and the company is now looking towards Office Productivity applications and cloud-based revenues to help them tide over the Windows bump.
Consensus EPS forecast for the first quarter is 0.68 on the back of $21.71 billion in revenues, which means the market is expecting flat to slight EPS growth in the first quarter compared to the prior period.
Even if Microsoft is able to report flat growth it will be a tremendous achievement for the company, signaling that new revenue drivers have reached the inflection point where they are ready to more than offset revenue declines from old business lines, especially Windows-based revenue streams.
As such, Microsoft’s 1Q-17 results, which Microsoft will be reporting on 20th October, will be extremely important to the company, as well as investors concerned about the future of Microsoft.
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