What's In The Cards For Microsoft (MSFT) In Q1 Earnings?

Microsoft Corporation (NASDAQ:MSFT) is set to report fiscal first-quarter 2017 results on Oct 20, after the market closes. Last quarter, the company posted a positive earnings surprise of 18.97%. Over the past four quarters, the company has posted an average positive earnings surprise of 11.49%.

Let’s see how things are shaping up for this announcement.

Factors at Play

Microsoft reported better-than-expected fiscal fourth-quarter results with both the top and the bottom lines exceeding the Zacks Consensus Estimate. While increased investment in the cloud impacted margins, forex was surprisingly an offsetting factor.

The company has a hybrid and hyperscale cloud spanning multiple jurisdictions, which makes it ideal for multinational companies and banks that have operations all over the world and are required to be in compliance with laws of the countries in which they operate. This is what Microsoft says has drawn some of the world’s largest banks to Azure.

Microsoft also offers 33K cloud services, which helps it capture big customers like Boeing (NYSE:BA), Rolls-Royce (LON:RR) and Schneider Electric (PA:SCHN). Another important customer it won in the fourth quarter was Facebook (NASDAQ:FB), which currently uses Office 365 for its 13K employees.

For fiscal first-quarter of 2017, Microsoft expects Productivity & Business Process revenues of $6.4-6.6 billion, Intelligent Cloud revenues of $6.1-$6.3 billion and More Personal Computing revenues of around $8.7-9.0 billion. This amounts to total revenue between $21.2 billion and $21.9 billion. Microsoft expects COGS of $7.5-$7.6 billion, opex of $7.35-$7.45 billion and other income/expense of $0.

Management said that 2017 opex will be in a range of $31.1-$31.4 billion as investments in strategic growth opportunities continue. Non GAAP tax rate is expected to be 20% (+/-2%), depending on the variability of factors such as mix of services revenue versus licensing revenues, the geographic mix of revenues and the timing of equity. A higher mix of cloud revenues is also expected to increase the tax rate.

Earnings Whispers

Our proven model does not conclusively show that Microsoft will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 68 cents. Hence, the difference is 0.00%.

Zacks Rank: Microsoft has a Zacks Rank #2, which increases the predictive power of ESP. However, ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

You could consider the following stocks with a positive Earnings ESP and a favorable Zacks Rank:

Asure Software, Inc. (NASDAQ:ASUR) , with an Earnings ESP of +14.29% and Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Barracuda Networks, Inc. (NYSE:CUDA) , with an Earnings ESP of +25.00% and Zacks Rank #1.

NetApp, Inc. (NASDAQ:NTAP) , with an Earnings ESP of +2.63% and a Zacks Rank #1.

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