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Will Cloud & Azure Adoption Aid Microsoft (MSFT) Q1 Earnings?

Zacks Equity Research

Microsoft Corporation MSFT is set to report first-quarter 2020 results on Oct 23.

The company’s first-quarter results are anticipated to reflect the benefits from enterprise strength, robust Office 365 & Azure adoption. Further, its blockchain deals, gaming segment and acquisition synergies are anticipated to have positively impacted the third-quarter results.

Robust execution and better-than-expected demand from customers for hybrid cloud offerings and strong Commercial business are anticipated to get reflected in the third-quarter results. The company’s third-quarter results are also likely to have benefited from strong performance of LinkedIn’s subscription products comprising membership, recruitment and education programs. In the last reported quarter, LinkedIn revenues surged 25% from the year-ago quarter (up 28% at cc).

Click here to know how the company’s overall Q1 performance is expected to be.

Microsoft Corporation Price, Consensus and EPS Surprise

 

Microsoft Corporation Price, Consensus and EPS Surprise

Microsoft Corporation price-consensus-eps-surprise-chart | Microsoft Corporation Quote

Cloud, Office, Azure & Gaming: Key Catalysts

For first-quarter 2020, Productivity and Business Processes revenues are expected between $10.7 billion and $10.9 billion, driven by double-digit growth in Dynamics, Office commercial and LinkedIn.

The Zacks Consensus Estimate for revenues for the Productivity and Business Processes segment is currently pegged at almost $10.87 billion, higher than $9.77 billion reported in the year-ago reported quarter.

Microsoft is anticipated to have benefited from growing user base of different applications like Microsoft 365 and Teams. Both solutions have been witnessing strong adoption. Microsoft latest Dynamics 365 has been chosen by Ste. Michelle Wine Estates — one of the notable premium wine companies in the United States in recent times. Notably, Microsoft’s Dynamics 365 Commerce aids retailers to seamlessly manage business processes.

The momentum is expected to have continued in the to-be-reported quarter.

Intelligent Cloud revenues (including GitHub) are anticipated between $10.3 billion and $10.5 billion. Azure's revenue growth is likely to reflect continued strength in the consumption and per-user based services.

The Zacks Consensus Estimate for revenues for the Intelligent Cloud segment is currently pegged at almost $10.37 billion, higher than $8.57 billion reported in the year-ago reported quarter.

The addition of new capabilities to Azure with focus on existing workloads like security, IoT and Edge AI is expected to get reflected in the company’s results in to-be reported quarter.

More Personal Computing revenues are expected between $10.7 billion and $11 billion. The company expects OEM revenues to grow sequentially owing to robust commercial demand. Surface revenues are anticipated to decline marginally year over year thanks to transitions in product lifecycle. Search advertising revenues, excluding TAC is expected to be in line on a sequential basis.

Gaming revenue is anticipated to be down year over year, owing to unfavorable hardware trends and declining console sales.

The Zacks Consensus Estimate for revenues for the More Personal Computing segment and Gaming are currently pegged at almost $10.95 billion and $2.49 billion, respectively.

Additionally, bundling new Surface devices sales with Office 365 is a smart move and anticipated to have bolstered Office 365 adoption.

Microsoft is leaving no stone unturned to enhance gaming business by making it as inclusive as possible with ongoing initiatives. Notably, gaming is now evolving from console to cloud-based platforms. In this regard, expanding the option of devices is noteworthy.

Moreover, the company is consistently integrating cloud capabilities of Azure into its gaming segment. This is facilitating the company to innovate gaming domain beyond exclusive gaming content on X-box consoles.

Consequently, higher adoption of Xbox Game Pass for PC service is expected to have contributed to gaming revenues in the to-be-reported quarter.

Zacks Rank & Stocks to Consider

Microsoft currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Alphabet Inc. GOOG, Cirrus Logic, Inc. CRUS and Taiwan Semiconductor Manufacturing Company Ltd. TSM. Each of the stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Alphabet, Cirrus Logic and Taiwan Semiconductor is currently pegged at 16.6%, 15% and 6.98%, respectively.

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