Solid Results Likely for Microsoft

Dan Romanoff: We are expecting a continuation of solid results for the most part within the software industry this quarter. For Microsoft, specifically, we think the setup is favorable heading into the print on April 24. Last quarter, Windows OEM results were weaker due to low-end chipset shortages at Intel, which were expected to drag on this quarter. While it won't be a negative surprise this quarter, it has the added benefit of already softer investor expectations. We're expecting the more important long-term trends to remain intact, and we still foresee very strong growth from Azure and Office365.

Two data points we think are critical are commercial cloud gross margin and Azure growth, both of which are provided on quarterly basis by the company. Azure is driving rapid growth in commercial cloud, and, even while it generates lower gross margin relative to the corporate average, those margins are improving rapidly as Azure scales and should help lift overall margins. These trends are at the core of our thesis for sustained growth.

Microsoft is increasingly being called on to help customers make digital transformations and is one of only a few companies that can deliver globally at scale. The company is well positioned with Azure by a virtue of both its strong presence in infrastructure and platform as a service and the software features it can bring to bear, such as artificial intelligence, on the entire platform. Further, Microsoft uniquely benefits from hybrid environments because whether it's on premise or in the cloud, it's still Windows. And it represents a more familiar step rather than a giant leap for customers to make.

Office365, meanwhile, maintains a virtual monopoly in productivity software, should benefit from continued seek growth and upselling. We think Microsoft is a consensus long for a good reason. They have missed only two quarters in the last five years and offer good long-term growth prospects at a very reasonable valuation in a pricey software segment.