It’s all about the cloud for Microsoft Corp. (MSFT) earnings after market's close today. 

Cloud Focus

The company’s blockbuster Windows software, which powered its growth in the 1990s, has witnessed a decline in revenue amid an industry-wide shift toward new business models. Instead, analysts and investors have shifted their attention to cloud revenues at the company, whose stock has moved in tandem with its cloud performance. For example, the stock price bumped up last quarter after Microsoft reported cloud revenues that beat analyst estimates. (See also: Microsoft Stock Soars On Azure Cloud Revenue).  

Under CEO Satya Nadella’s leadership, Microsoft has moved quickly to transition its software, such as the Office suite of products, to cloud platforms and on multiple devices. It also acquired LinkedIn Corp. (LNKD) to boost its cloud Dynamics solution. Plus, it notched up major victories with commitments from Boeing Co. (BA) and Adobe Systems Inc. (ADBE) for Azure, its cloud platform. The company also introduced a slew of new features that impressed analysts at its Ignite conference in Atlanta last month. Microsoft ranks second behind Amazon.com Inc. (AMZN) in the cloud sweepstakes with a 10% share of the overall market.   

Turning Point

But the stock’s trajectory could still turn this quarter. (See also: Is Microsoft Still A Bargain At All-Time Highs?

Amy E. Hood, chief financial officer at the company, predicted a two-point negative impact for overall revenues as well as cloud revenues for this quarter during the last earnings call. She said the decline in revenue was due to “historic seasonality.” Cloud revenues are expected to decline due to volatility in the commercial transactional business. The volatility mainly occurs due to a decline in revenues for Microsoft as it convinces customers to shift their business to the cloud from on-premise software. This can lessen profits as cloud-based software depends on long-term agreements and significantly less monthly recurring revenue from customers, instead of an upfront licensing fee.

Accounting Issues

There is also the problem with the company’s accounting for cloud revenues. The company books cloud revenue through its Commercial cloud and Intelligent cloud. But the difference between the two types of cloud is unclear. For example, the commercial cloud division, which reported revenue runs rate of $20 billion by fiscal year 2018 (or by 2017), includes revenues from Azure, the company’s cloud platform, which is also part of the Intelligent cloud. This could cause problems for the company's revenue accounting down the line.  

 

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