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Will Azure Act in Favor of Microsoft (MSFT) in Q4 Earnings?

Zacks

Microsoft Corp MSFT is set to report fourth-quarter fiscal 2017 results on Jul 20. Notably, the company has a positive record of earnings surprises in the trailing four quarters, with an average surprise of 10.40%.

Last quarter, the company posted a positive earnings surprise of 5.80%. Earnings (adjusted for Windows 10 deferrals and currency effect) of 73 cents per share increased 15% year over year but declined 12% on a sequential basis.

Revenues (adjusted for Windows 10 deferrals) of $23.56 billion decreased 9.6% sequentially but increased 6.3% from the year-ago quarter (up 7% in constant currency or CC). Further, it exceeded the Zacks Consensus Estimate of $23.55 billion.

Notably, Azure revenues soared 94% at CC on a year-over-year basis. Microsoft noted that Azure premium revenues grew triple digits for the 11th consecutive quarter, with more than 80% of Azure customers using the premium services.

Microsoft Corporation Price and EPS Surprise

Microsoft Corporation Price and EPS Surprise | Microsoft Corporation Quote


Azure’s strong performance has also helped the company to outperform the S&P 500 on a year-to-date basis. The stock returned 17.1%, while the index gained 10%.



Let’s see how things are shaping up for this announcement.

Factors at Play

We believe that Azure’s performance will be the key catalyst in the to-be reported quarter. Microsoft anticipates commercial cloud services to continue to drive annuity growth, on the back of expanding installed base, growing consumption and higher number of renewals.

Management forecasts commercial unearned revenues of $26.8–$27 billion, in line with historical seasonality. We note that acquisitions like Deis have aided in expanding Azure’s features that will continue to improve installed base going forward.

However, Amazon Web Services (AWS) continues to dominate the cloud computing market trailed by Azure. We believe that increasing competition from the likes of Alphabet GOOGL, IBM, salesforce.com and Oracle toughens growth opportunities for Azure, which can hurt results.

Apart from Azure, increasing adoption of Windows 10 and Office 365 are growth factors. Gartner in its latest report projects IT spending to increase 2.4% over 2016 to $3.48 trillion in 2017. The figure is much better than earlier projection of 1.4% growth. Improving spending on enterprise software is major positive for Windows, Office 365 and related applications.

Meanwhile, declining PC shipments in the second quarter – as per data available from both Gartner and IDC – is a concern for the company. Both market research firms agreed that shortage of key components, including DRAM, SSD and LCD panels, is escalating PC prices, in turn thwarting the overall demand.

Earnings Whispers

Our proven model does not conclusively show that Microsoft will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 71 cents. Hence, the difference is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Microsoft carries a Zacks Rank #2, which when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

You can consider the following stocks with a positive Earnings ESP and a favorable Zacks Rank:

IPG Photonics IPGP, with an Earnings ESP of +3.07% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lam Research LRCX, with an Earnings ESP of +1.33% and a Zacks Rank #1.

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