Microsoft (MSFT) is scheduled to report results of the third quarter of its fiscal year 2019 after the market close on Wednesday, April 24, with a conference call scheduled for 5:30 pm ET. What to watch for:
1. CLOUD: In the second quarter, Microsoft reported $9.4B in "Intelligent Cloud" segment revenue, up 20% year over year. Server products and cloud services revenue increased 24%, driven by Azure revenue growth of 76%, the company noted. On April 17, KeyBanc analyst Brent Bracelin raised his price target for Microsoft to $141 from $125 on increasing confidence in the company's cloud and digital strategy. The analyst sees the March quarter as another positive milestone and part of a broader multi-year cloud and digital journey that has structurally improved the prospects of sustaining double-digit annual growth. Office 365 subscription Annualized Recurring Revenue, or ARR, could top $20B for the first time, while Azure could top $12B, he contended, adding that robust commercial cloud growth of 43% could push the cloud mix to 33% versus 5% in FY15. Bracelin reiterated an Overweight rating on Microsoft shares.
2. PC MARKET: In Q2, Microsoft reported "More Personal Computing" revenue was up 7% year-over-year to $13.0B, noting that Windows OEM revenue declined 5%, Windows Commercial products and cloud services revenue increased 13%, Surface revenue increased 39% and Gaming revenue increased 8%. On April 11, Gartner reported that worldwide PC shipments totaled 58.5M units in the first quarter of 2019, a 4.6% decline from the first quarter of 2018. "We saw the start of a rebound in PC shipments in mid-2018, but anticipation of a disruption by CPU shortages impacted all PC markets as vendors allocated to the higher-margin business and Chromebook segment...Supply constraints affected the vendor competitive landscape as leading vendors had better allocation of chips and also began sourcing alternative CPUs from AMD (AMD)," said Mikako Kitagawa, senior principal analyst at Gartner.
3. WALL STREET BULLISH: In addition to KeyBanc's Bracelin, Wedbush analyst Daniel Ives recently raised his price target for Microsoft to $150 from $140 ahead of quarterly results. The analyst expects the company to post a "solid beat" across the board on both the top and bottom line as cloud strength in Azure and Office 365 continues, noting that strong field checks indicate Microsoft could beat commercial cloud expectations by about 3%-4%. Ives believes the shift to cloud is a major secular trend and key tailwind that is significantly benefiting Microsoft in the field and should continue its momentum based on his checks showing an inflection point of demand is abound. Stifel analyst Brad Reback also raised his price target on Microsoft shares to $130 from $120 ahead of the company's Q3 report, stating that he expects upside to his in-line estimates given the constructive IT spending environment, expectations for commercial Office 365 gains in selling price and units, strength in Azure and gaming and "less bad" IDC shipment data. Reback maintains a Buy rating on Microsoft.
4. DESIRE TO BUY ZOOM?: On April 18, the day that Zoom Video (ZM) came public via an initial public offering, Recode's Theodore Schleifer reported that multiple people briefed on the matter told him that Microsoft made "repeated" attempts to buy the maker of video chat tools over the years, but talks never grew serious. One approach happened as late as earlier this year, one source said, according to Schleifer's report.
Keywords: earnings watch, earnings, third quarter, Q3, results, quarterly results, guidance, windows, cloud