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Factors You Must Note Ahead of Microsoft's (MSFT) Q1 Earnings

Zacks.com logo Zacks.com 10/21/2020

Microsoft MSFT is slated to release first-quarter fiscal 2021 results on Oct 27.

The Zacks Consensus Estimate for fiscal first-quarter earnings has remained steady over the past 30 days at $1.53 per share, indicating an improvement of 10.9% from the year-ago reported figure.

The Zacks Consensus Estimate for revenues stands at $35.67 billion, suggesting growth of 7.9% from the prior-year quarter.

Notably, the company has a trailing four-quarter earnings surprise of 10.21%, on average. In the last reported quarter, Microsoft delivered an earnings surprise of 5.8%.

Factors Likely to Have Influenced Q1 Performance

Microsoft’s fiscal first-quarter performance is likely to reflect strong adoption of its cloud computing platform — Azure. Moreover, the company’s workspace communication offering, Teams, has been witnessing a robust surge in usage courtesy of the coronavirus-induced work-from-home, stay-at-home, telehealth and online learning wave.

Growing clout of Teams and solid Azure traction instills investor confidence in the company, which currently carries a Zacks Rank #3 (Hold). Notably, shares of Microsoft have returned 36.1% year to date, compared with the industry’s growth of 33.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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

Markedly, during the quarter under review, the tech giant introduced Together mode feature to Teams in a bid to make video meetings lively and dynamic, and enhance user experience. Instead of focusing on individuals in neat squares in different backgrounds, the Together mode removes the backgrounds and condenses all the participants into a shared space resembling an auditorium.

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 first quarter.

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

In the gaming segment, Microsoft has been taking significant steps, including the acquisition of ZeniMax Media. The company is expected to have gained from an increase in Xbox Live monthly active users and the adoption of Game Pass subscriptions courtesy of robust demand for online gaming solutions, on 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 third quarter, may have contributed to the fiscal first-quarter performance. Per IDC data, PC shipments in third-quarter 2020 improved 14.6% year over year to 81.3 million units.

Microsoft Corporation Price and EPS Surprise

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Microsoft Corporation price-eps-surprise | Microsoft Corporation Quote

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 owing to the coronavirus outbreak are likely to have weighed on LinkedIn and Search revenues. Also, sluggishness in transactional business across small and medium businesses might have limited growth.

Noteworthy Developments in Q1

Coronavirus crisis has compelled companies globally to alter their spending strategies. Microsoft isn’t immune to the trend. In fact, during the fiscal first quarter, the tech giant announced the spin-off of Xiaoice, the AI chatbot, into a separate company.

Markedly, the company also announced a major acquisition deal.

Microsoft inked deal to acquire leading video game publisher Bethesda Softworks’ parent company ZeniMax Media for an all-cash deal valued at $7.5 billion. The buyout will enable Microsoft to gain access to all ZeniMax’s creative studios like Bethesda Softworks, Bethesda Game Studios, ZeniMax Online Studios, and Roundhouse Studios along with all their video game franchises. This brings the number of in-house development studios to 23 from 15 for Microsoft. (Read More: Microsoft's Bethesda Buyout to Intensify Console Gaming War)

Moreover, the latest Azure and Teams focused healthcare deals to combat coronavirus crisis, including partnership with Nuance Communications, deserves a special mention. (Read More: Microsoft Augments Teams App to Boost Telehealth Experience)

Further, strategic partnerships with MSCI Inc., Samsung Electronics, Halliburton and Accenture remain noteworthy. Notably, Microsoft and AT&T T expanded partnership with focus on integration of secure cloud computing and network technology, in a bid to enhance IoT networking. (Read More: Microsoft & AT&T Join Forces to Boost IoT Deployment)

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