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Microsoft (MSFT) Q3 2019 Earnings Preview: Cloud, Gaming, Office & More

Benjamin Rains

Microsoft MSFT stock has outpaced the market in 2019, up over 17% as the tech powerhouse continues to prove that its investments beyond its core software business, such as cloud computing, have paid off. Now, as the first quarter earnings season starts to get underway, let’s see what to expect from Microsoft’s Q3 fiscal 2019 financial results that are expected to drop on April 25.

Overview

Microsoft’s portfolio today includes its historic Windows software and Office offerings, along with its tablet and hardware business that competes alongside Apple AAPL and others. Meanwhile, the Redmond, Washington-based company’s acquisitions have helped the company expand. For instance, business-focused social media firm LinkedIn saw its revenue soar 29% last quarter, with record engagement levels.

Microsoft is also a major player in the gaming industry. Yet, maybe unlike some of its peers like Sony SNE and Nintendo NTDOY, MSFT looks poised to be at the forefront of the streaming, cloud-based gaming revolution. This speaks to the company’s ability to quickly expand its cloud business.

Microsoft, led by its Azure division, is currently the second-largest cloud firm in the industry behind only Amazon AMZN. The company boasts an array of Fortune 500 clients that help the company top Google GOOGL, IBM IBM, and Alibaba BABA. For example, MSFT last summer landed a massive, five-year cloud deal with Walmart WMT, which also includes “AI and IoT solutions for enterprise-wide use.” And Microsoft could attract more large customers that don’t want to help Amazon expand in any way.

 

 

Q3 Outlook

Looking ahead, our current Zacks Consensus Estimate calls for Microsoft’s Q3 revenue to pop 11.2% to reach $29.83 billion. This would mark a small downturn from the second quarter’s 12% revenue expansion, but investors should note that the firm topped our Q2 estimate.

More specifically, Microsoft’s Intelligent Cloud revenue is projected to jump approximately 17.6% from $7.896 billion in the year-ago period to reach $9.282 billion, based on our NFM estimate. Last quarter, MSFT’s cloud revenue climbed 20% to $9.378 billion.

On top of that, the company’s More Personal Computing unit is projected to reach $10.461 billion, which would mark a roughly 5.5% jump from Q3 2018. The division that includes Windows OEM, gaming, and Surface, climbed around 7% last quarter. Microsoft doesn’t officially dive into actual revenue for its Xbox-driven gaming unit, but it does report percentage growth. Therefore, Gaming revenue is expected to surge roughly 8.4%, which would top Q2’s 8%.

The last unit MSFT break downs and investors should pay attention to is Productivity and Business Processes. The division, which includes, Office, LinkedIn, and more, saw its revenue jump 13% last quarter to reach $10.1 billion. In the third quarter, Productivity and Business Processes revenue is projected to jump 11.7% to $10.05 billion.

Moving on to the bottom end of the income statement, MSFT’s adjusted Q3 earnings are projected to pop 5.3% to hit $1.00 a share. On top of that, the company’s current full-year earnings are projected to jump 13.7%, with 2020’s EPS figure expected to climb 12.5% above our 2019 estimate.

 

 

Bottom Line

Clearly, the company’s Q3 top-line growth is expected to come in a bit below last quarter’s level. But the firm could always top estimates, which are also subject to change if analysts update their projections as we get closer to the official report.

Microsoft is currently a Zacks Ranks #3 (Hold) based on its mixed earnings estimate revision activity. With that said, the company does have a strong history of quarterly earnings beats, including an average surprise of 9.3% over trailing four periods.

Investors should also note that the company is a dividend payer, with a 1.53% yield at the moment. Plus, MSFT has consistently traded at a discount to compared to its industry’s average over the last decade, despite its shares easily outpacing the Computer Software-Services Market average. Microsoft stock is currently trading at 24.7X forward 12-month Zacks Consensus EPS estimates, which comes in below its industry’s 27X average.

Shares of MSFT closed regular trading Tuesday down 0.54% at $119.28 per share, just below their 52-week high. Microsoft is estimated to report its Q3 fiscal 2019 financial results on April, 25. It is worth noting, however, that the company has not officially announced its earnings release date.

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