Microsoft (MSFT) Q3 Earnings To Gain From Azure & Office 365

Microsoft Corp. (NASDAQ:MSFT) is set to report third-quarter 2019 results on Apr 24. Notably, the company’s beaten the Zacks Consensus Estimate for earnings in the trailing four quarters, recording an average positive surprise of 9.3%.

Microsoft delivered second-quarter fiscal 2019 earnings of $1.10 per share, surpassing the Zacks Consensus Estimate by a penny. The figure jumped 14.6% on a year-over-year basis.

Revenues of $32.47 billion increased 12% from the year-ago quarter. The figure marginally surpassed the Zacks Consensus Estimate of $32.45 billion.

The Zacks Consensus Estimate for third-quarter earnings is pegged at $1.00 per share, unchanged for the last 30 days. This reflects an increase of about 5.3% from year-ago earnings. The Zacks Consensus Estimate for quarterly estimate stands at $29.83 billion, suggesting an increase of 11.2% year over year.

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

Factors to Watch Out

Microsoft returned 26.7% in the past year, outperforming the industry’s rally of 23.2%.

Momentum in Microsoft’s cloud computing service — Azure — is likely to drive growth in the to-be-reported quarter. Notably, Azure revenues soared 76% at constant currency on a year-over-year basis in the last reported quarter.

The company added almost 100 new capabilities to Azure in the last reported quarter, with focus on existing workloads like security and new workloads like Internet of Things (IoT) and Edge artificial intelligence (AI). Azure's revenue growth is likely to reflect continued strength in the consumption and per-user based services, which in turn will aid the company’s top line in the quarter under review.

Notably, Azure has become a preferred partner for government departments in recent times. Microsoft’s contract from the U.S. Department of Defense (DoD), under which the company will provide enterprise services for the Pentagon Defense Department, cloud Coast Guard and intelligence services, bodes well.

Further, Microsoft is leaving no stone unturned to integrate cloud capabilities of Azure into its gaming segment. This is enabling the company to innovate its gaming domain beyond exclusive gaming content on Xbox consoles.

We believe Microsoft’s domain expertise in gaming and strength in Azure sets it apart from peers in both cloud and gaming sectors. The same also poises the company well to capitalize on the cloud gaming market. We believe Microsoft’s Azure adoption will help in expanding customer base and boost top-line growth in the first quarter.

Microsoft’s Office 365 Consumer subscribers came in at 33.3 million at the end of the second quarter. The company Office 365 commercial revenues grew 34% year over year, driven by strong installed base growth and average revenues per user (ARPU) expansion. The company expects Office to be in the low-single digits in the first-quarter due to growth in Office 365 which will partially be offset on account of consumer PC market headwinds.

Expanding portfolio is a major growth driver. The company is incorporating AI capabilities in its Office 365 solutions, which are expected to boost top line in the to-be-reported quarter.

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 currently has a Zacks Rank #3 and an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks with Favorable Combination

Here are some stocks that are worth considering as our model shows that these have the right combination of elements to deliver an earnings beat in the upcoming releases.

Xilinx, Inc. (NASDAQ:XLNX) has an Earnings ESP of +1.75% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Veritex Holdings, Inc. (NASDAQ:VBTX) has an Earnings ESP of +0.58% and a Zacks Rank #2.

Lockheed Martin Corporation (NYSE:LMT) has an Earnings ESP of +4.16% and a Zacks Rank #3.

Zacks' Top 10 Stocks for 2019

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