KeyBanc analyst Michael Turits says large distributors/resellers checks point to continued strong growth
Microsoft (MSFT) is scheduled to report results of the third quarter of its fiscal year 2021 after the market close on April 27, with a conference call scheduled for 5:30 pm ET. What to watch for:
1. OUTLOOK: During the company's last earnings call, Microsoft said it saw third quarter Productivity and Business Processes revenue at $13.35B-$13.6B, Intelligent Cloud revenue between $14.7B-14.95B and More Personal Computing revenue of $12.3-12.7B. The company also expects third quarter gaming segment growth to be up about 40%, COGS between $13.1B-$13.9B, and third quarter tax rate of about 15%.
2. STRONG GROWTH: On Monday, KeyBanc analyst Michael Turits raised the firm's price target on Microsoft to $295 from $280 ahead of quarterly results, while keeping an Overweight rating on the shares. The analyst cited continued strong growth indicated by large distributors/resellers checks, strong IT demand signaled by KBCM's first quarter VAR survey, positive prints from SAP (SAP)/IBM (IBM), and strong growth in PC shipments reported by Gartner(IT)/IDC. Further, Azure growth and O365 upgrade trends remain strong, he added. Turits continues to see Microsoft's combination of expanding Azure scope, broad enterprise application innovation, and aggressive bundling seeing success in the market.
Last week, Citi analyst Tyler Radke had also raised the firm's price target on Microsoft to $302 from $292 and kept a Buy rating on the shares. Additionally, the analyst opened a "positive Catalyst Watch" on the shares ahead of the company's fiscal third quarter results. The combination of a reseller survey and channel checks provide incremental confidence that Microsoft can drive revenue upside across its key three segments, Radke contended. The analyst continues to see Microsoft as the best-positioned megacap in software. The company's double-digit growth at scale is sustainable given ramping Azure consumption and upsell motions around O365, he added.
3. NUANCE ACQUISITION: Earlier this month, Microsoft and Nuance Communications (NUAN) announced they have entered into a definitive agreement under which the former will acquire Nuance for $56 per share, in an all-cash transaction valued at $19.7B, inclusive of Nuance's net debt. Mark Benjamin will remain CEO of Nuance, reporting to Scott Guthrie, executive vice president of Cloud & AI at Microsoft. The transaction is intended to close this calendar year. Upon closing, Microsoft expects Nuance's financials to be reported as part of Microsoft's Intelligent Cloud segment. Microsoft expects the acquisition to be minimally dilutive - less than 1% - in fiscal year 2022 and to be accretive in fiscal year 2023 to non-GAAP earnings per share, based on the expected close timeframe. Non-GAAP excludes expected impact of purchase accounting adjustments, as well as integration and transaction-related expenses.
4. HOLOLENS GOGGLES ARMY CONTRACT: Alex Kipman, Microsoft Technical Fellow, stated in a post to the company's blog that, " the United States Army announced that it will work with Microsoft on the production phase of the Integrated Visual Augmentation System program as it moves from rapid prototyping to production and rapid fielding. The IVAS headset, based on HoloLens and augmented by Microsoft Azure cloud services, delivers a platform that will keep Soldiers safer and make them more effective. The program delivers enhanced situational awareness, enabling information sharing and decision-making in a variety of scenarios."