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What Wall Street wants from Microsoft earnings

David Paul Morris | Bloomberg | Getty Images

Wall Street expects Microsoft to report solid earnings and continued cloud growth when it reports quarterly results after the close of trading Thursday.

Analysts expect the world's biggest software company to post earnings of 79 cents per share on revenue of $25.28 billion for the December quarter, according to Thomson Reuters.

Investors are particularly focused on how fast Microsoft is growing its higher margin cloud offerings — including cloud computing platform Azure and its web-based suite of productivity programs Office 365 — while controlling costs.

"It all boils down to is the Azure business growing and growing profitably," said Stifel analyst Brad Reback. "If Azure is the growth engine we think it is and can pick up market share from AWS, then the company is well positioned for the next couple of decades." (Reback has a Buy rating on the stock and a $66 price target.)

Microsoft began reporting commercial cloud gross margins for the first time last quarter — to add more transparency to its business — and this metric will continue to be important to investors, he said. Last quarter, Microsoft reported a commercial cloud gross margin 49 percent, up from 42 percent in the prior quarter.

Though Amazon's AWS is clearly in the lead today, Microsoft's Azure is quickly closing the gap, said PiperJaffray analyst Alex Zukin. Azure's core functions are finally comparable to AWS's and Microsoft's customer support, existing relationships and contract flexibility make Azure particularly appealing to many businesses, he said. Azure is doing well in the retail sector as retailers are wary of sharing their data with Amazon or funding a competitor, he said.

"This is an extremely large market and its turning into a duopoly where the majority of vendors are going to pick AWS or Azure," he said. Zurkin rates the stock a "Buy" with an $80 price target.

The company is also expected to announce job cuts as part of a previously announced plan to cut 2,850 jobs by June 2017. The December quarter was the last quarter to suffer "meaningful overhang" from the Nokia deal Microsoft has been working to unwind, said Reback.

With so many moving parts of the business, analysts will be listening closely for commentary and any additional metrics executives may share on the earnings conference call on Thursday at 2.30 p.m. Pacific.

Analysts expect Microsoft to return to robust revenue growth — reversing two years of declines — next quarter. That's also when the company will begin to fold in LinkedIn's contribution to its earnings, after closing the deal to acquire the company for $26.2 billion on December 8, 2016.

Analysts credit CEO Satya Nadella for leading the company through its transition from legacy businesses to new high growth cloud businesses. Most analysts who cover the stock — 69 percent — recommend buying it, according to data compiled by Factset.

"He's done a phenomenal job — think about the sentiment now versus four years ago — it's astounding," said Reback "It's like [Louis] Gerstner's turnaround of IBM without the near-death experience."