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Factors Setting the Tone for Microsoft's (MSFT) Q2 Earnings

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Zacks Equity Research
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Microsoft MSFT is scheduled to report second-quarter fiscal 2021 results on Jan 26.

The Zacks Consensus Estimate for fiscal second-quarter earnings has remained steady over the past 30 days at $1.64 per share, indicating an improvement of 8.6% from the year-ago reported figure.

The Zacks Consensus Estimate for revenues stands at $40.12 billion, suggesting growth of 8.7% from the prior-year quarter.

Notably, the company has a trailing four-quarter earnings surprise of 12.35%, on average. In the last reported quarter, Microsoft delivered an earnings surprise of 18.95%.

Factors to Note

Microsoft’s fiscal second-quarter performance is likely to reflect gains from ongoing momentum in its cloud computing platform — Azure.

Microsoft Corporation Price and EPS Surprise

Microsoft Corporation Price and EPS Surprise
Microsoft Corporation Price and EPS Surprise

Microsoft Corporation price-eps-surprise | Microsoft Corporation Quote

Moreover, 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.

Growing clout of Teams and solid Azure demand instills investor confidence in the company, which currently carries a Zacks Rank #3 (Hold). Notably, shares of Microsoft have returned 35.4% in the past one year, compared with the industry’s rally of 26.6%. 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.

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

Nevertheless, increasing investments in cloud and AI engineering amid 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 second quarter.

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.

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.

Strikingly, Microsoft has collaborated with Warner Bros to design an arcade-style video game for Xbox consoles inspired by the upcoming movie Space Jam: A New Legacy.

The company is expected to have gained from an increase in Xbox Live monthly active users and adoption of Game Pass subscriptions courtesy 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 fourth quarter, may have contributed to the fiscal second-quarter performance. Per IDC data, PC shipments in fourth-quarter 2020 improved 26.1% year over year to 91.6 million units.

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 and lower spend on advertising due to the coronavirus outbreak might have weighed on LinkedIn and Search revenues. Also, sluggishness in transactional business across small and medium businesses is likely to have limited growth in the fiscal second quarter.

Strategic Developments in Q2

During the fiscal second quarter, the tech giant in collaboration with C3.ai and Adobe ADBE announced the roll out of C3 AI CRM, AI-first customer relationship management solution, powered by Microsoft Dynamics 365. The new offering is integrated with Adobe Experience Cloud and aimed at enabling enterprises to drive operations with predictive business insights.

Microsoft also struck a five-year alliance with Rockwell Automation in a bid to develop industrial solutions to help clients in that vertical to enhance productivity and lower infrastructure costs.

Further, the company unveiled Pluton security processor aimed at boosting the security for Windows PCs. The Redmond-based tech biggie is working alongside AMD, Qualcomm and Intel for Pluton processor. (Read More: Microsoft Announces Pluton Processor: Key Takeaways)

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