Microsoft's (MSFT) Q3 Earnings To Benefit From Azure Growth

Microsoft Corp (NASDAQ:MSFT) is set to report third-quarter fiscal 2018 results on Apr 26.

The company’s cloud computing service — Azure — has been the key catalyst in recent times. In the last quarter, Azure revenues soared 98% at constant currency on a year-over-year basis. Moreover, Azure premium revenues grew triple digits for the 14th consecutive quarter.

Adoption remains strong as evident from growing customer base. Azure has been selected by the likes of United Technologies (NYSE:UTX) and Columbia Sportswear. Data center expansion also continues with Azure now in 42 regions globally, more than any other cloud provider.

Further, the acquisitions of PlayFab and Avere Systems are likely to strengthen Azure’s enterprise-strength capabilities. According to data from Synergy Research, Azure gained market share at a much faster rate compared with Amazon (NASDAQ:AMZN) Web Service and Alphabet’s (NASDAQ:GOOGL) Google.

For the third quarter, Microsoft expects Intelligent Cloud revenues (Azure falls under this segment) between $7.55 billion and $7.75 billion. The company anticipates another quarter of double-digit revenue growth across server products and cloud services.

Hence, a strong customer commitment to Azure is expected to drive cloud revenues further, keeping Microsoft unbeatable in this high return segment.

The Zacks Consensus Estimate for revenues for the Intelligent Cloud segment is currently pegged at $7.70 billion, higher than $6.76 billion reported in the year-ago quarter.

Robust Office 365 Adoption, LinkedIn (NYSE:LNKD) Growth Other Drivers

Office 365 is a subscription plan to access Office applications and other productivity services utilized in cloud services. Microsoft is striving to catch up with Alphabet’s G-Suite by empowering Office 365.

The launch of a plethora of products — Microsoft Teams in Office 365 for Education, Microsoft 365, Microsoft Relationship Sales solution and ISV Cloud Embed — is anticipated to drive installed base. Moreover, the company continues to add features to Windows 10 that makes it more attractive for consumers as well as enterprises.

LinkedIn is also growing much faster than previously anticipated. As LinkedIn becomes more integrated into the Microsoft, it is expected to push overall top-line growth above 10% (when combined with Azure/O365).

The Zacks Consensus Estimate for revenues for the Productivity and Business Processes segment is currently pegged at $8.76 billion, higher than $7.96 reported in the year-ago quarter.

Positive Earnings Surprise History

Notably, Microsoft has a positive record of earnings surprises in the trailing four quarters, with an average surprise of 18.03%. Last quarter, the company delivered a positive earnings surprise of 11.63%.

Microsoft has also beaten the Zacks Consensus Estimate for revenues in the last four trailing quarters. In the last quarter, revenues of $28.92 billion increased almost 12% from the year-ago quarter (up 11% in constant currency). Further, the figure marginally exceeded the Zacks Consensus Estimate of $28.35 billion.

The Zacks Consensus Estimate for third-quarter fiscal 2018 earnings and revenues are currently pegged at 85 cents and $25.71 billion, respectively.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Microsoft has a Zacks Rank #3 and an Earnings ESP of +1.22%, which indicates a likely positive surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Other Stocks to Consider

Here are few stocks you may consider as our proven model shows that these too have the right combination of elements to post an earnings beat this quarter.

Western Digital (NASDAQ:WDC) has an Earnings ESP of +2.30% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Paycom Software (NYSE:PAYC) has an Earnings ESP of +0.33% and a Zacks Rank #1.

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