Microsoft Earnings on Deck: What to Watch In Its March Quarter Earnings

Microsoft warned investors weeks ago that coronavirus disrupted its device shipments, but expects its results in other segments to be unaffected by the pandemic.
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Microsoft stock has outperformed the market this year, and its upcoming earnings will be the first major test of how well the sprawling business has held up in the coronavirus pandemic. 

The tech giant reports its March quarter results on April 29 after the close of trading, and shares are up about 9% year to date amid losses across all major indexes. Microsoft  (MSFT) - Get Report closed on Friday at $174.55 per share.

Analysts polled by FactSet are expecting earnings of $1.29 per share on revenue of $33.84 billion. Here's what to whatch when Microsoft reports its March quarter results. 

1. More Personal Computing

Microsoft was among the first multinationals to warn investors of the impact of coronavirus on its financial results. In Microsoft’s case, supply chain disruptions in China weakened shipments of Windows PCs and Surface devices, both grouped in its More Personal Computing (MPC) segment. Microsoft pulled its original guidance of between $10.75 billion and $11.15 billion for that segment, but said it expected other segments to remain unchanged.

The company’s commentary on the quarter, and its forward-looking guidance for the segment, could shed light on the present condition of its China supply chain -- as well as expectations for demand going forward. In a recent earnings preview, RBC Capital Markets analyst Alex Zukin forecast that quarterly revenue for Microsoft’s MPC segment will come in at $9.96 billion, but added that device headwinds are likely to worsen before they get better before starting to moderate later this year. Zukin maintains an outperform rating and $190 price target on Microsoft shares. 

2. Azure Growth

With device sales poised to fall, investors are looking to Microsoft’s cloud businesses to make up some of the difference. Azure, Microsoft’s answer to Amazon’s  (AMZN) - Get Report AWS, has shown steady growth in recent quarters -- but results for that division could be a mixed bag, according to Piper Sandler analyst Brent Bracelin.

Writing in a recent note, Bracelin wrote that mass cloud adoption among businesses is the principal growth driver for Microsoft over the long term. But for the March quarter, its Intelligent Cloud division -- which consists of Azure, hybrid and traditional servers and various cloud services -- could see Azure growth offset by COVID-related disruptions across its traditional server divisions. Bracelin forecast overall revenues of about $12 billion in the division, including $5.2 billion from Azure, but cautioned that traditional servers and some enterprise cloud service could be “directly impacted by travel restrictions.” Bracelin holds an overweight rating and $192 price target on Microsoft shares. 

3. Microsoft 365

Despite disruptions to some elements of Microsoft’s business, coronavirus and widespread work-from-home procedures have been a boon for some of its services. The company said earlier this month that Microsoft Teams, its work collaboration product, had surged to 44 million users in the weeks prior, as remote work spread. Microsoft also spun up a new consumer version of Teams aimed at personal and family use. 

It isn't yet clear how much work-from-home will impact financial results for Microsoft 365 in the March quarter. Microsoft is poised to benefit from a growing focus on security measures surrounding remote work, Third Bridge analyst Scott Kessler recently argued, and plenty of others are bullish Microsoft Teams and Microsoft 365, its broader work collaboration suite. But don't expect a big work-from-home bump to Microsoft's March quarter revenue, wrote Deutsche Bank's Karl Keirstead recently: "Microsoft’s Teams collaboration software is experiencing a huge usage spike, but the direct revenue recognition from Teams is modest...and any usage or capacity spike doesn’t even show up as Azure revenues." Keirstead maintains a Buy rating and price target of $180 on Microsoft shares.  

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