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Will Cloud Dominate Microsoft's Q4 Earnings Story Today?

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Microsoft Corporation MSFT is scheduled to report fiscal fourth-quarter earnings on Jul 22, after market close. Investors, no doubt, are curious to see the impact of the coronavirus pandemic on the software behemoth’s business during the June quarter. So, in order to get an understanding about the company’s state of finances and operations, let’s take a closer look – 

Intelligent Cloud Business 

Microsoft’s Intelligent Cloud business will be much in focus as several companies poured money into the cloud infrastructure in the June quarter. This is because social-distancing measures imposed to curb the spread of COVID-19 compelled people to work or learn from home. And as several people started working from home, companies had to move a bulk portion of their workloads to the cloud. Shelter-in-place measures also compelled consumers to shop online, necessitating a digital presence for most consumer-oriented businesses.

 

Piper Sandler, analyst Brent Bracelin, expects Microsoft’s cloud business to have reached nearly 40% of its total sales for the first time in the June quarter. Most importantly, all eyes will be on the Azure division, which has now become a significant growth driver for Microsoft.

 

Notably, Azure generated almost $13 billion in revenues last year, accounting for more than 10% of Microsoft’s total revenues. Azure’s revenues also rose 59% annually during the March quarter. And as COVID-19 fueled higher public cloud usage, with more customers upgrading their cloud infrastructure, Azure’s revenue growth is likely to have improved in the June quarter as well. Wedbush analyst Dan Ives estimates 55% year-over-year growth at Microsoft’s Azure division in fourth-quarter fiscal 2020.

 

Analysts are also bullish about the company’s other growing portfolio of cloud business, especially, the Teams platform. As more people worked from home in the June quarter, Microsoft’s Teams, or the workplace collaboration tool saw its usage improve significantly. Microsoft’s Teams, which competes with the likes of Slack, Dropbox and Zoom, saw new visitors to its platform climbing 943% in May compared to the same period last year.

 

But not only Microsoft’s cloud business, other divisions are also believed to have been in good shape in the fourth quarter.

Other Hot Segments

Among the weak points in Microsoft’s fiscal third quarter was Windows revenues. After all, supply chain disturbances because of the pandemic and its effect on production in China weakened shipments of Windows PCs and Surface devices, which are part of the Personal Computing segment. It’s worth pointing out that China exports nearly 50% of the world’s technologies, including computers, laptops and other components.

 

However, due to strong reversal in PC shipments in the June quarter, Windows revenues are expected to have improved. Gartner forecasted PC shipments to have increased 3% in the said quarter, while International Data Corporation projected an 11% rise.

 

At the same time, Microsoft expects its Productivity and Business Process segment that includes Office and Dynamics business along with LinkedIn, to record June quarter revenues of $11.65 billion to $11.95 billion, suggesting an improvement from $11.05 billion a year ago. And how can we forget that lockdowns in the June quarter fueled gaming activity. Thus, Microsoft’s revenues from gaming activities that cover Xbox sales, game sales, Xbox game royalties and services such as Xbox Live and Xbox Game Pass are likely to have improved.

Here’s What to Expect

Despite the economic impact of COVID-19, Microsoft’s predominant focus on cloud might have saved it from a coronavirus crash in the June quarter. To top it, sales growth momentum in its Windows, Productivity and Business Process, and Gaming divisions also bodes well.

 

Thus, the Zacks Consensus Estimate for Microsoft’s revenues of $36.59 billion for the June quarter suggests year-over-year growth of 8.5%. The Zacks Rank #3 (Hold) company’s earnings per share are expected at $1.38, indicating a 0.7% rise from the year-ago level. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

 

 

Positive results, no doubt, will lead to a rally in the share price. The company’s expected earnings growth rate for the current quarter and year is 7.3% and 19.8%, respectively. In fact, so far this year, the tech major has been a star performer with respect to the broader market. Microsoft has returned 32.4% compared with the Computer - Software industry’s 27.5%.

 

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