Software Stocks Earnings on Jan 31: MSFT, CTXS, PYPL & CDNS

Technology sector earnings gain steam in this week of the Q4 reporting cycle. Notably, the technology sector has been witnessing an upside since the last year on the back of innovative ideas and technological advancements. Driverless cars, facial recognition payments technology, advancements in artificial intelligence, advanced driver assisted systems (ADAS), increased demand for cloud storage and Internet of Things (IoT) related software are aiding growth.

Per the latest Earnings Preview, Technology is one of the five sectors anticipated to report double-digit earnings growth with the other four being Oil/Energy, Basic Materials, Industrial Products and Construction. Per the report, total earnings for the tech sector are projected to be up 16.8% on 9.3% higher revenues.

However, this does not ensure earnings beat for all companies in the space. It should be noted that a company’s earnings outperformance is dependent on the overall business environment, as well as management’s ability to implement operating and strategic plans.

In other words, a company may perform dismally despite a favorable business environment if it fails to capitalize on the opportunities due to lack of execution.

Notably, our research shows that the chance of beating earnings estimates is high when a stock carries a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and has a positive Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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

Let’s see what’s in store for these four software stocks, all of which are expected to release quarterly numbers on Jan 31.

Microsoft Corporation MSFT, a broad-based technology provider, is set to release its second-quarter fiscal 2018 results. Microsoft is likely to beat expectations as it has a favorable combination of a Zacks Rank #3 and an Earnings ESP of +0.21%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Microsoft’s revenues is pegged at $28.35 billion, representing an 8.8% year-over-year increase. The consensus estimate for earnings stands at 86 cents per share, reflecting an increase of 3.6% from the year-ago actual figure.

The company’s Azure Cloud Platform is likely to be a major contributor to growth. In the last few years, Microsoft has strengthened its position in public cloud service space through acquisitions and data center expansions. Notably, revenues from Azure increased 89% in the first quarter. The trend is likely to continue in the to-be-reported quarter as well. Additionally, strong adoption of its Office 365 and Windows 10 is also anticipated to drive second-quarter revenues. (Read more: Will Microsoft's Q2 Earnings Prove Personal Computing Is Back?)

Microsoft Corporation Price and EPS Surprise

Citrix Systems Inc. CTXS, a provider of virtualization, networking and cloud computing solutions, is set to release its fourth-quarter 2017 results. The stock has an Earnings ESP of +0.52% and carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings and revenues is pegged at $1.60 per share and $777.6 million, respectively.

The company’s efforts to expand its product portfolio have helped it to add customers. Also, the merger between LogMeIn and Citrix's GoTo business, completed last February, is likely to be accretive in the quarter to be reported. The company is also expected to be positively impacted by sequential increase in SaaS revenues. (Read more: Will Robust SaaS Revenues Aid Citrix's Q4 Earnings?)

Similarly, PayPal Holdings, Inc. PYPL, a technology platform offering online payment solutions, is also likely to beat fourth-quarter 2017 estimates as it has an Earnings ESP of +0.11% and a Zacks Rank #3. The Zacks Consensus Estimate for the quarter under review is pegged at 52 cents, representing remarkable year-over-year growth of 23.8%. Additionally, analysts polled by Zacks project revenues of roughly $3.63 billion, up 21.8% from the year-ago quarter.

PayPal is likely to benefit from its increasing customer base as well as total transaction volume. Additionally, partnership with the likes of Visa and MasterCard is expected to impact the company’s revenues. (Read more: Mobile Payment & Alliances to Fuel PayPal Q4 Earnings)

Cadence Design Systems, Inc. CDNS, a provider of products and tools that help customers to design electronic products, is set to announce its fourth-quarter 2017 results. The stock has an Earnings ESP of 0.00% and a Zacks Rank #3. The Zacks Consensus Estimate for earnings and revenues are pegged at 39 cents and $497.9 million, respectively. When compared with the year-ago quarter, the projected earnings and revenues represent an increase of 14.7% and 6.2%, respectively.

The company is likely to benefit from its innovative product portfolio, which is helping designers to produce original designs backed by faster compliance and enhanced IP verification. Moreover, collaborations with the likes of Xilinx and TSMC will aid its revenues. (Read more: What's in Store for Cadence Design in Q4 Earnings?)

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