Ahead of its June quarter (fiscal fourth quarter) earnings release on Wednesday after the close, all 13 analysts listed in FactSet maintain a Buy rating on Microsoft's stock, although most have lowered their profit estimates for Microsoft's fiscal fourth quarter, which is the first one that has overlapped entirely with the COVID-19 pandemic.
"We have seen Microsoft become one of the major forces in helping enterprises transform amidst Covid-19, and the two big beneficiaries have been its cloud infrastructure and remote collaboration businesses,” said Nick McQuire, VP at CCS Insight. "However, we are now in a new economic reality and swaths of companies are having to readjust and rebuild. Microsoft will likely elevate key areas such as customer success and engagement, industry specialism, pro services and skilling in order to show it is helping companies not only land but stick to their digital transformation investments.”
On average, analysts are expecting total revenue of $36.54 billion and earnings of $1.34 for the quarter ending in June. Here are a few key themes to watch:
1. Commercial Cloud Growth
Microsoft's cloud business could reach 40% of overall sales for the first time in the June quarter, driven by high growth in its commercial cloud offerings, according to Piper Sandler analyst Brent Bracelin. Braceline includes in Microsoft's commercial cloud group Azure Commercial Cloud, LinkedIn Commercial Cloud and Dynamics 365 Commercial Cloud, and thinks the group could grow in excess of 31% year-over-year in the second quarter, driven in part by the current work-from-home dynamic (on Tuesday, however, Microsoft said it was cutting 6% of the jobs at LinkedIn as fewer companies are hiring workers).
Despite economic headwinds, the segment appears poised for more growth "as digital enterprise adoption plans begin to resurface with greater acceptance and urgency," wrote Bracelin. Microsoft has announced a slew of new strategic partnerships with BlackRock, Coca-Cola, FedEx, the NBA and others. On Wednesday, watch for Microsoft's comments on what trends they saw in the second quarter, and sources of growth in its cloud business.
2. Personal Computing
Among the weak spots in Microsoft's fiscal third quarter earnings release was Windows revenue, which was dragged down in part by lower demand for corporate desktops. At the time, Microsoft told investors to expect its Windows OEM revenue, which is driven by new PC sales, to rise by a low-to-mid single-digit percentage; for its Windows commercial business, it guided for revenue growth in the mid-single digits.
That modest guidance could leave room for upside in Windows OEM, according to Jeffries analyst Brent Thill, due to a "strong reversal in PC shipments." Gartner forecasts PC shipments to rise 3% in calendar Q2, while IDC estimates an 11% rise. Both show an acceleration from the prior quarter, which could work in Microsoft's favor.
Microsoft's Azure has been a linchpin of the company's overall growth story in the past few years. Although the company doesn't break out Azure revenue in raw dollar terms, investors are keenly tuned in to Azure developments, the pace of its growth and how it stacks up against competitors such as Amazon (AMZN) - Get Report AWS and Google (GOOGL) - Get Report Cloud.
Last quarter, Microsoft cautioned that Azure growth would moderate to the low-50% range because of industries heavily impacted by COVID-19, and that server products revenue would fall (both are included in Microsoft's intelligent computing segment). Based on healthy cloud deal activity, Wedbush analyst Dan Ives estimates 55% growth in Azure. But in the current economic environment, it's safe to expect relatively muted Azure growth in quarters to come. On the other hand, Microsoft's diversified cloud product mix make it "the core cloud name to play" in COVID-19, Ives wrote.