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Here's How Microsoft (MSFT) Looks Ahead of Q3 Earnings Release

Zacks Equity Research
·5-min read

Microsoft MSFT is slated to release third-quarter fiscal 2021 results on Apr 27.

The Zacks Consensus Estimate for fiscal third-quarter earnings has remained steady over the past 30 days at $1.76 per share, indicating an improvement of 25.7% from the year-ago reported figure.

The Zacks Consensus Estimate for revenues stands at $40.94 billion, suggesting growth of 16.9% from the prior-year quarter.

Notably, the company has a trailing four-quarter earnings surprise of 14.69%, on average. In the last reported quarter, Microsoft delivered an earnings surprise of 23.78%.

Microsoft Corporation Price and EPS Surprise

Microsoft Corporation price-eps-surprise | Microsoft Corporation Quote

Factors Likely To Have Influenced Q3 Results

Ongoing momentum in its cloud computing platform, Azure, is likely to have benefited Microsoft’s fiscal third-quarter performance.

Further, the company’s workspace communication offering, Teams, has been witnessing a robust surge in usage courtesy of the coronavirus-induced video conferencing demand led by work-from-home, stay-at-home, telehealth and online learning wave.

During the quarter under review, Microsoft announced that Teams is being leveraged by SAP SE SAP across its solutions portfolio including SAP S/4HANA, SAP SuccessFactors and SAP Customer Experience.

Solid uptick in Teams and strong Azure demand instills investor confidence in the company, which currently carries a Zacks Rank #2 (Buy). Notably, shares of Microsoft have returned 16.1% in the year-to-date period, compared with the industry’s rally of 12.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company continues to enhance Teams with a slew of new capabilities that enable users to work from home seamlessly, which might have driven growth amid the ongoing coronavirus crisis.

Moreover, new Together mode feature in Teams to make video meetings lively and dynamic, and enhance user experience, is expected to have bolstered adoption.



Talking about Office suite, strong upsell opportunity for Microsoft E5 and momentum in Microsoft 365 are expected to have contributed to growth in Office commercial.

Incidentally, the tech giant rolled out Microsoft Viva, an employee experience platform, aimed at enhancing employee engagement, wellbeing, learning, and knowledge discovery. Viva is integrated with the productivity and collaboration capabilities in Microsoft 365 and Microsoft Teams to provide better experience. The company also enhanced Microsoft Translator offering with the addition of Inuktitut text translation.

In the gaming segment, Microsoft has been taking significant steps, including the launch of next generation Xbox Series X and S, in a bid to provide console gamers worldwide with immersive gaming experiences.

The company is anticipated to have gained from an increase in Xbox Live monthly active users and adoption of Game Pass subscriptions on account of robust demand for online gaming solutions, courtesy of stay-at-home trends.

Further, work-from-home and stay-at-home driven online learning wave in the wake of coronavirus-led lockdown has been boosting demand for office equipment, which is likely to have generated incremental revenues from Surface devices in the to-be-reported quarter.

In fact, encouraging trend in PC shipments in the first quarter, may have contributed to the fiscal third-quarter performance. Per IDC data, PC shipments in first-quarter 2021 improved 55.2% year over year to 84 million units.

Also, traction witnessed by HoloLens 2 deserves a special mention. Markedly, the tech giant secured a U.S. army contract worth $21.88 billion, spread across 10-year period. The tech giant is committed to furnish 120,000 AR headsets for the Army based on their Integrated Visual Augmentation System (IVAS) design requirements. The modified design enhances robust augmented reality (AR) capabilities of HoloLens 2 with customized upgrades. (Read More: Microsoft Wins $22B AR Headset Contract from U.S. Army)

Additionally, Microsoft has been striving to enhance the LinkedIn platform with robust AI, CRM capabilities at different levels, while maintaining user data privacy preferences. This may have bolstered the adoption of LinkedIn’s subscription products, comprising membership and LinkedIn Learning programs. This, in turn, is likely to get reflected in the to-be-reported quarter’s top line.

However, broader macroeconomic weakness due to the coronavirus outbreak might have weighed on LinkedIn and Search revenues.

Noteworthy Developments in Q3

During the fiscal third quarter, the tech giant announced collaboration with Volkswagen Group's software company Car.Software Organisation, in an effort to develop a cloud-based Automated Driving Platform (ADP) on Microsoft Azure and utilize its compute and data capabilities to provide enhanced automated driving experiences at global scale.

Microsoft also struck an alliance with Amadeus to provide innovative cloud-based travel solutions to boost travel experiences. The companies will utilize Azure platform along with Microsoft’s other solutions like Microsoft 365, Dynamics 365, Microsoft Teams and Microsoft Power Platform to build custom solutions for the travel industry.

Further, the company announced acquisition of The Marsden Group, which offers industrial technology innovation and rapid prototyping solutions, in a bid to strengthen digital transformation capabilities across its cloud, edge and AI products.

Although increasing investments in cloud and AI engineering via product enhancements and acquisitions bodes well over the longer haul, the same is likely to have hindered the company’s fiscal third-quarter profitability. Further, stiff competition from Amazon AMZN in the cloud computing vertical and Zoom Video Communications ZM in enterprise communication domain might have limited margin expansion in the fiscal third quarter.

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