Microsoft Corporation Earnings Preview

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Microsoft Corporation (NASDAQ:MSFT) Q1 FY2018 earnings are set for release today after closing bell, and Wall Street is expecting 72 cents per share in earnings on $23.5 billion in sales. The company guided for revenue of $23 billion to $23.7 billion for the quarter. In the previous year’s first fiscal quarter, Microsoft reported 76 cents per share in earnings on $22.33 billion in revenue.

Stock price target boosted ahead of Microsoft Q1 FY2018 earnings

Stifel analyst Brad Reback raised his price target for Microsoft stock from $80 to $85 and reiterated his Buy rating in a note earlier this week. He expects the company to beat on both the top and bottom lines riding on its commercial cloud segment.

Reback looks for a 24% year-over-year increase in Productivity and Business Process revenue, which would bring it to $7.98 billion, in line with consensus. He noted that the LinkedIn acquisition provided some inorganic growth and that Office 365 continues to show gains. Microsoft guided for $7.85 billion to $8.05 billion in revenue for this segment.

The analyst expects Intelligent Cloud revenues to grow 10.6% to $6.74 billion on the back of Azure and strength in annuity server hybrid cloud products. The company guided for $6.55 billion to $6.75 billion in revenue for this segment, while consensus expects $6.7 billion. Reback expects upside to come from the transactional business. He expects overall commercial cloud revenue to be at a run rate of approximately $19 billion, a 50% year-over-year increase.

He projects a 6.6% decline in More Personal Computing revenue, which would bring it to $8.77 billion. Microsoft guided for $8.6 billion to $8.9 billion in revenue for this segment, and the Street is looking for $8.81 billion.

For the company’s second fiscal quarter, he’s currently projecting 81 cents per share in earnings on $28.75 billion in sales, versus the consensus estimates of 83 cents per share and $26.06 billion in revenue.

Strong trends in Office and Azure

Piper Jaffray analyst Alex Zukin has an Overweight rating and $90 price target on Microsoft stock going into tonight’s earnings report. His checks pointed to sustained demand for Office 365 with a “healthy pipeline” and growth catalysts for Azure in both the near and long term. Microsoft partners have told him that demand for Office 365 has even surpassed the company’s own expectations, and the biggest Office 365 re-seller said momentum “remains well above expectations” with “very durable” unit and revenue growth.

He said growing cloud adoption across industries is driving adoption of Microsoft’s commercial cloud products and that the most popular product is E3, the full suite of productivity offerings, excluding PowerBI, Skype and a number of more advanced security features. He adds that some companies do migrate from E3 to E5 because of increasing focus on analytics (PowerBI) and security. The company’s partners also told him that Microsoft is becoming more and more optimistic on PowerBI adoption.

Further, he explained that often Office 365 deployments are done in phases along with hardware refreshes. He described this trend as “both interesting and important” because he feels it suggests the company “essentially has a significant amount of ‘contracted backlog’ that will continue to flow into reported numbers over time.”

In the hours leading up to the Microsoft Q1 FY2018 earnings release, the company’s stock ticked higher by as much as 0.8% to $79.24.

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