Microsoft Corp.’s MSFT cloud computing service — Azure — has been the major catalyst in recent times. We note that strong Office 365 and Windows 10 adoption are other growth drivers. The company is set to report second-quarter 2018 results on Jan 31.
Click here to know how the company’s overall Q2 performance is expected to be.
Microsoft Corporation Price and EPS Surprise
Segments to Aid Microsoft’s Growth
Microsoft operates under three primary business segments: Productivity & Business Processes, Intelligent Cloud, and More Personal Computing.
The Productivity & Business Processes unit includes the company’s Office, Office 365, LinkedIn, and Dynamics CRM businesses. Last quarter, revenues from this segment jumped 28% (up 28% at cc) on a year-over-year basis to $8.24 billion.
We note that strong Office 365 is another catalyst. 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 expected to drive installed base.
Productivity and Business Processes revenues are expected between $8.75 billion and $8.95 billion in the to-be-reported quarter. Office 365 commercial growth will continue to outpace the transactional decline. Management expects a more moderate rate of growth in Office consumer business. Dynamics revenue is anticipated to grow double digit, driven by the ongoing shift to Dynamics 365. LinkedIn revenues are projected to be $1.2 billion.
The Zacks Consensus Estimate for revenues for the Productivity and Business Processes segment is currently pegged at $8.877 billion, up 20.3% year over year.
Microsoft’s Intelligent Cloud unit contains its server and enterprise products, including Azure. The segment reported revenues of $6.92 billion, up 13.5% (13% at cc) year over year. Microsoft noted that Azure premium revenues grew triple digits for the 13th consecutive quarter.
Adoption remains strong as evident from the growing customer base. Azure has been selected by the likes of Costco, Symantec, Bank of America Corporation, TD Bank and Sumitomo Mitsui Banking Corporation.
Data center expansion continues with Azure now in 42 regions globally, more than any other cloud provider. Microsoft’s acquisition of Avere Systems, a start-up specializing in data storage systems, will help strengthen and increase the utilization of its Azure public cloud. The company’s cloud services are a major contributor to its revenue stream. Per the company’s first-quarter fiscal 2018 results, server product and cloud services revenues went up 17% year over year, with Azure revenues soaring 89%.
We believe that robust adoption of Azure will continue to drive Microsoft’s top-line in the soon-to-be reported quarter.
Microsoft is also gaining from its increasing traction in blockchain technology. Its collaboration with Bank Hapoalim for the use of blockchain technology for digital bank guarantees is aiding Azure to penetrate the cloud market.
The Zacks Consensus Estimate for revenues for the Intelligent Cloud segment is currently pegged at $7.501 billion, up 9.3% year.
The More Personal Computing segment includes Windows, Gaming, Devices, and Search businesses. Revenues were almost flat year over year at $9.38 billion. Excluding phone business, revenues grew 3% (same at cc). Windows 10 Commercial monthly active devices grew 90% year over year.
Microsoft continues to add features to Windows 10 that makes it more attractive for consumers as well as enterprises.
Over the past several years, global demand for personal computers and related software has plummeted. This put Microsoft in a tricky situation; the company known for its innovative Windows operating system now needed to rebrand itself as a tech leader that could adapt to the times.
In many ways, Microsoft has done just that. For one, the company moved to a “freemium” model with Windows 10, offering the new OS as a free upgrade and focusing on the monetization of compatible apps and services.
Recently, the company released updates for Windows to prevent malware attacks from exploiting Meltdown Vulnerability in Intel x86-64 processors. This software update is part of a series of updates that will shield against the newly discovered processor bug in Intel, AMD and ARM chipsets.
Microsoft is also one of the largest providers of gaming hardware. The Xbox One X has a wide adoption rate as evident from its early sales figures. It has been outperforming Sony’s PS4 Pro by a significant margin. Moreover, high product adoption rates as well as robust performance from its surface line of devices are driving the top line.
The Zacks Consensus Estimate for revenues for the More Personal Computing segment is currently pegged at $12.01 billion, up 1.6% year.
Zacks Rank and Stocks to Consider
Microsoft carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the broader technology sector include Applied Materials, Inc. AMAT, NVIDIA Corporation NVDA and Vishay Intertechnology, Inc. VSH, all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The long-term earnings growth rate for Applied Materials, NVIDIA and Vishay are projected at 12.7%, 10.3 and 20.6%, respectively.
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