Factors Setting the Tone for Microsoft's (MSFT) Q4 Results

Microsoft MSFT is scheduled to report fourth-quarter fiscal 2020 results on Jul 22.

The Zacks Consensus Estimate for fiscal fourth-quarter earnings has remained steady over the past 30 days at $1.40 per share, indicating an improvement of 2.2% from the year-ago reported figure.

The Zacks Consensus Estimate for revenues stands at $36.59 billion, suggesting growth of 8.5% from the prior-year quarter.

Notably, the company has a trailing four-quarter earnings surprise of 12.06%, on average. In the last reported quarter, Microsoft delivered an earnings surprise of 10.24%.

Factors to Note

Robust uptake of Microsoft’s cloud computing platform — Azure — is likely to have contributed to the fiscal fourth-quarter performance.

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.

Increasing popularity of Teams and solid Azure traction instill investor confidence in the company, currently carrying a Zacks Rank #3 (Hold). Notably, shares of Microsoft have returned 29.7% year to date, compared with the industry’s rally of 24.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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

Moreover, 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, delays in consulting business contract renewals and supply chain constraints in China are anticipated to have limited growth.

In the gaming segment, the tech giant 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, improving trend in PC shipments in the second quarter, driven by increased demand and improvement in the supply chain, may have contributed to the fiscal fourth-quarter performance. Per Gartner’s preliminary data, PC shipments in second-quarter 2020 improved 2.8% year over year to 64.8 million units.

Microsoft Corporation Price and EPS Surprise

Microsoft Corporation Price and EPS Surprise

Microsoft Corporation price-eps-surprise | Microsoft Corporation Quote

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 fourth quarter.

Strategic Developments in Q4

Coronavirus crisis has compelled companies globally to alter their spending strategies. Microsoft isn’t immune to the trend.

In fact, during the fiscal fourth quarter, the tech giant announced that it will shut down all brick-and-mortar Microsoft Stores as part of rethinking digital retail strategy. The company anticipates this move to result in a pre-tax charge, pertaining to asset write-offs and impairments, of nearly $450 million or 5 cents per share, which will be accounted for, in fourth-quarter fiscal 2020 ending Jun 30, 2020.

Besides, Microsoft announced that it is closing the operations side of Mixer. The company has teamed up with Facebook FB to help Mixer community to shift to Facebook Gaming platform.

Nevertheless, the company also announced acquisition deals, including CyberX, ADRM Software, and Metaswitch Networks, in a bid to strengthen cloud-based capabilities and aid enterprises to accelerate digital transformation.

Moreover, the latest Azure-focused healthcare deals to combat coronavirus crisis, including partnerships with Adaptive Biotechnologies and UnitedHealth Group, deserves a special mention.

Further, strategic partnerships with Sony Semiconductor Solutions and FedEx remain noteworthy.

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