Microsoft Earnings: What Morgan Stanley Is Watching

In a report published Thursday, analysts at Morgan Stanley maintain their Equal-Weight rating on Microsoft Corporation MSFT. The price target has been maintained at $46. Given that the company appeared to be facing challenges to seamlessly executing its new plan in FQ2, investors are likely to focus on Microsoft's FQ3 performance to gain confidence in the company's ability to post sustainable EPS growth. The analysts, on the other hand, are keeping their eye on Microsoft's gross margins. "After a disappointing FQ2, the focus for Microsoft's FQ3 will be stability in key metrics, particularly around commercial billings growth, as well as Windows revenue," the analysts said. Commercial billings growth witnessed a deceleration in growth from about 10 percent, year on year, to about 4-6 percent in FQ2. Windows revenue was also down during the quarter. Investors would need to see stable improvement in billings growth to be able to gain confidence in the sustainability of growth with Microsoft transitioning to the cloud. "We expect PCs will be weak in FQ3 (although likely better than feared), but we remain cautious on declining ASPs and the potential for upcoming revenue recognition changes with Win10. We expect an incremental ~0.5% headwind to revenue growth in FQ3 due to weakening FX since last guidance," the analysts added. However, Morgan Stanley does expect the company to see some savings, driven by operational efficiencies and headcount reductions during FY15.