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Microsoft (MSFT) to Report Q1 Earnings: What to Expect?

Zacks Equity Research

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

Notably, the company has an average positive earnings surprise of 11.7% in the trailing four quarters. In the last reported quarter, Microsoft delivered a positive earnings surprise of 13.2%.

Which Way are Q1 Estimates Treading?

The Zacks Consensus Estimate for first-quarter earnings is pegged at $1.25 per share, indicating an improvement of about 9.6% from year-ago quarter. The figure has remained unchanged for the last seven days. The Zacks Consensus Estimate for revenues stands at $32.23 billion, suggesting growth of 10.8% year over year.

Past-Quarter Performance

Microsoft had reported fourth-quarter fiscal 2019 non-GAAP earnings of $1.37 per share, which beat the Zacks Consensus Estimate of $1.21 per share. Further, the figure surged 21% on a year-over-year basis (up 24% in constant currency or cc).

Revenues of $33.72 billion improved 12% from the year-ago quarter (up 14% in constant currency or cc). The figure also surpassed the Zacks Consensus Estimate of $32.73 billion.

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

Microsoft Corporation Price and EPS Surprise


Microsoft Corporation Price and EPS Surprise

Microsoft Corporation price-eps-surprise | Microsoft Corporation Quote

Factors to Watch

Momentum in Microsoft’s cloud computing service — Azure — is likely to have contributed to the first-quarter performance. Robust execution and better-than-expected demand from customers for hybrid cloud offerings is anticipated to get reflected in the quarterly results. Notably, Azure revenues surged 68% at constant currency on a year-over-year basis in the last reported quarter.

The company added many new capabilities to Azure, with focus on existing workloads like security and new workloads like IoT and Edge AI. This is likely to have contributed to continued strength in consumption and per-user based services and consequently the top line in the first quarter.

Further, Microsoft is leaving no stone unturned to integrate cloud capabilities of Azure into its gaming segment. This in turn is aiding the company in innovation and expansion beyond exclusive gaming content on X-box consoles.

In this regard, Microsoft recently selected NVIDIA’s real-time ray tracing technology to provide enhanced graphics on personal computers (PC) for Minecraft video game players.

We believe Microsoft’s domain expertise in gaming and strength in Azure provides it a competitive edge over peers in both cloud and gaming sectors. The same also poises the company well to capitalize on the cloud gaming market. In fact, Microsoft’s Azure adoption is likely to have contributed to expanding customer base and consequently the top line in the first quarter.

Key Developments in Q1

Microsoft is one of the many notable companies that are undertaking significant investments in renewable energy. In this regard, Microsoft and the Netherlands-based KLM recently inked a Letter of Intent with focus on reducing carbon footprint by development of sustainable air travel practices. The latest deal focusing on employee impact on environment is in sync with its goals and highlights the company’s commitment to greener and sustainable environment. These initiatives are expected to enhance the company’s brand value.

The company is also empowering its Dynamics 365 platform with AI and ML driven capabilities to aid industries automate business processes and drive innovation. In this regard, its latest Dynamics 365 Commerce offering has been recently selected by Ste. Michelle Wine Estates — one of the notable premium wine companies in the United States. Notably, Microsoft’s Dynamics 365 Commerce aids retailers to seamlessly manage business processes.

Markedly, Microsoft and Reliance Industries Limited also recently inked 10-year deal in a bid to accelerate digital transformation in India. Per the deal, Reliance Industries subsidiary, Jio Infocomm Limited or Jio, will develop data centers in India. Jio will utilize Microsoft Azure’s cloud infrastructure services including Azure AI and collaboration solutions of Office 365, among others.

This is a big win for Azure as it is expected to significantly strengthen presence in India and provide it an edge against cloud computing rivals, Amazon’s AMZN Amazon Web Services (AWS) and Alphabet’s Google Cloud Platform (GCP).

Expanding portfolio is a major growth driver.

Here is What Our Quantitative Model Predicts

Microsoft does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Microsoftis -0.55%.

Zacks Rank: Microsoft currently carries a Zacks Rank of 3.

Stocks With Favorable Combination

Here are a few stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat.

Veoneer, Inc. VNE has an Earnings ESP of +7.17% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SAP SE SAP has an Earnings ESP of +4.35% and a Zacks Rank #3.

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