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How is Cloud King Microsoft (MSFT) Geared Up for Q1 Earnings?

Zacks Equity Research

Microsoft Corporation MSFT is set to report first-quarter fiscal 2020 earnings on Oct 23, after market close. The personal computer maker has ventured into the commercial cloud business in recent years which seem to have drawn higher revenues for the company in previous quarters. Will the commercial cloud business and strong outlook help it to beat earnings estimates?

Cloud to Shower Revenues

Microsoft’s commercial cloud businesses like Office 365, Azure and Dynamic 365 have been crowd pullers, grabbing the attention of business houses and commercial centers. It can be clearly seen that the cloud business is providing momentum to the software big shot.

Although Amazon.com, Inc.’s AMZN AWS pre-dominates the commercial cloud market, Microsoft’s Azure is giving it tough competition. The cloud market is gradually getting saturated with big players like Alphabet Inc.’s GOOG Google cloud service and International Business Machines Corporation’s IBM IBM Cloud making progress to grab a share in this high-in-demand sector.

Microsoft’s Azure cloud platform, specifically, has seen healthy growth. Looking at the June quarter’s results, we see that Azure’s revenues grew 64% year over year. Microsoft’s fiscal Q4 commercial cloud revenues had increased 39% year over year to $ 11 billion. Revenues from two other eye-catching services, Office 365 and Dynamic 365, rose 14% and 12% year over year. These apart, Microsoft’s gaming unit, surface laptop and tablets business have also seen growth.

The buoyancy in the above business lines is expected to have continued in the fiscal first quarter. In fact, Deutsche Bank’s recent estimates indicate that Azure’s revenues would rise 72% in 2019 followed by 58% in 2020. Office 365 and Dynamic 365 are in strong demand among mid-market firms.

Strong revenues from the Windows OEM line is projected due to rush in licenses for new PC’s. Microsoft’s slated termination of the Windows 7 support in January 2020 is expected to have triggered a rise in PC upgrade activities in the fiscal first quarter.

We also see optimism surrounding the company’s core product line revenues given the IDC and Gartner's calendar Q3 data which indicate healthy business PC demand. Added to this is Microsoft’s CFO Amy Hood’s upbeat tone on Windows commercial performance on the previous earnings call.

Moreover, Microsoft’s prime subsidiary, LinkedIn, has kept hauling in double-digit revenues, in turn boosting its advertisement and marketing revenues in several quarters. We expect the same show to continue.

Strong Outlook and Shares Northbound

This trillion-dollar company has a Zacks Consensus Estimate of $1.25 for earnings and $32.23 billion for revenues for fiscal Q1. This indicates growth of nearly 10% in both earnings and revenues.

Microsoft has an Earnings ESP of +0.31%. This is Zacks’ proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Microsoft carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our research shows that for stocks with the combination of a Zacks Rank #3 or better and a positive Earnings ESP, the chance of an earnings beat is as high as 70%.

The company’s expected earnings growth rate for the current year is 9.7%, in contrast to industry’s decline of 0.5%. Microsoft has outperformed the Computer - Software industry over year-to-date period (+34.3% vs +29.8%).

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