Microsoft Q4 2020 earnings preview: It’s all about Azure

Microsoft Q4 2020 earnings preview: It’s all about Azure

Microsoft (MSFT) is set to report its fiscal Q4 2020 earnings on Wednesday, and much of the focus will continue to be on the tech giant’s Intelligent Cloud business, which analysts say should see steady improvements as firms continue to pour money into their cloud infrastructure.

Here’s what analysts are expecting from the report, as compiled by Bloomberg, compared to Microsoft’s performance in the same fiscal quarter ending June 30 last year.

The story of Microsoft’s growth over the past several years has been its Intelligent Cloud business, which includes its powerful Azure platform. In fiscal Q4 2019, Microsoft reported 64{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} revenue growth from Azure, with the entire Intelligent Cloud business, which is also made up of server products and enterprise services, growing by 19{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}. Total revenue for the business hit $11.4 billion for the quarter.

Microsoft reported that the coronavirus pandemic had little impact on its fiscal Q3 2020 performance, though it did note that towards the end of the quarter, which wrapped up March 31, there “was a slowdown in transactional licensing, particularly in small and medium businesses, and a reduction in advertising spend in LinkedIn.”

It would stand to reason that Microsoft would see an increase in customers spending on their cloud platforms to better support their employees’ needs as they work from home through the pandemic.

“In many cases we are seeing enterprises accelerate their digital transformation and cloud strategy with Microsoft by 6 to 12 months as the prospects of a heavy remote workforce for the foreseeable future now looks in the cards with this COVID-19 backdrop,” Wedbush analyst Dan Ives wrote in a research note.

Ives believes Microsoft’s Azure will see 55{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} year-over-year growth in fiscal Q4 2020, and that spending on the platform as well as Microsoft’s Office 365 will continue despite economic fallout from the virus.

With a screen displaying some of the new Microsoft Azure services and updates in the background, Microsoft CEO Satya Nadella delivers the keynote address at Build, the company’s annual conference for software developers Monday, May 6, 2019, in Seattle. (AP Photo/Elaine Thompson)

“We believe 85{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}-90{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of these cloud deployments have already been green lighted by CIOs as we are seeing in the field, budgets are firmly in place, with a very low risk (relatively speaking) of any major push outs for the June quarter from our vantage point,” he wrote in his note.

BMO Capital Markets analyst Keith Bachman offers a similar outlook for Microsoft through the coronavirus crisis.

“We envision modest upside to revs, EPS, and FCF relative to consensus estimates despite the lingering effects of the pandemic,” he wrote in a research note.

Moving forward, however, Bachman points to tough margin comparisons between fiscal year 2020 and fiscal year 2021.

According to Bachman, end-of-support for Microsoft’s Windows Server and Windows 7 helped push growth in the company’s Intelligent Cloud and More Personal Computing segments. That benefit, however, should drop off in fiscal Q4 2020, he said. 

“As a result, we have lowered our FY21 consolidated operating margin assumption to 36.7{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} from 37.1{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}, and thus lowered our EPS estimate to $6.23 from $6.29, or in line with consensus,” Bachman wrote in his note.

Despite that, he says that Microsoft is well positioned for the next five years, despite trading at 1.15 times the S&P 500 based on free cash flow valuation, and raised BMO’s price target for the stock to $235.

We’ll be following Microsoft’s announcement as it happens after the bell on Wednesday. Stay tuned.

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