Microsoft Braces for Another Nokia Hit

By Shira Ovide

Microsoft is slated to disclose Thursday after market close the company's financial results for its fiscal first quarter ended Sept. 30. Here's what to keep an eye on:
Earnings forecast:
Microsoft is expected to post earnings of 50 cents a share, according to the average of analyst estimates gathered by Thomson Reuters. A year earlier, Microsoft posted earnings of 62 cents a share. Analysts expect a drag of about 6 cents a share related to Microsoft's widespread job cuts that started this summer and costs to integrate Nokia's mobile-phone business. Microsoft doesn't issue quarterly financial guidance.

Revenue forecast:
The company is expected to report revenue of $22 billion, compared with $18.5 billion a year earlier. The revenue comparison is skewed a bit because Microsoft in April closed the purchase of Nokia's mobile-phone business, which contributes roughly $2 billion in quarterly revenue.

WHAT TO WATCH:

--Cloud, Cloud, Cloud:
CEO Satya Nadella earlier this week pitched Microsoft's strength in cloud-based business services and said the company is uniquely positioned to help companies modernize their technology. Microsoft's cloud software sold to businesses--primarily the Web-friendly version of Office, a tool for salespeople, and its Azure online computing-power-by-the-hour service--more than doubled to $2.8 billion, or roughly 3% of Microsoft's total revenue, for the most recent fiscal year. Investors are anxious to see the pace of cloud growth continue, and they're watching for signposts of how much Microsoft's cloud sales erode higher-margin revenue from its traditional software licensing businesses.

--Nokia deadweight:
Microsoft said it would cut roughly $1 billion from Nokia's annual operating costs by June, as the company tries to stop Nokia from losing money hand-over-fist. Wall Street will warmly greet any sign that the cost of merging Nokia into the rest of Microsoft's operations is falling faster than expected. The next Nokia problem: Sell more smartphones, fast. Microsoft's market share in smartphones is slipping from tiny to even tinier--now about 2.5%.

--Consumer businesses:
Microsoft makes roughly two-thirds of its gross profit from sales of software to companies. But Nadella has said Microsoft needs its consumer products, too, in part because they fuel demand for business offerings. Morgan Stanley expects an improvement in demand for PCs will boost consumer sales of Windows 5% from a rough market a year earlier, while sales to consumers of Office are expected to fall roughly 15% from a year ago. Problem is: The more Xbox consoles and Nokia phones that Microsoft sells to consumers, the lower Microsoft's traditionally plump operating margins will fall. They've already eroded from a percentage in the mid-70s a couple years ago to 65% or so.

Culled from: http://www.foxbusiness.com