Microsoft Expected to Post Slight Year-on-Year Growth in First-Quarter Earnings, Revenue

Microsoft (MSFT) is expected by analysts to report slight year-over-year increases in fiscal first-quarter adjusted earnings and revenue on Thursday afternoon, with analysts hoping for signs of server-products growth, improving commercial-cloud margins and abating foreign-exchange headwinds.

On average, for the quarter ended in September, analysts expect Microsoft to post adjusted earnings per share of $0.68, up slightly from $0.67 a year earlier, according to the mean estimate of analysts polled by Capital IQ. The analysts’ mean estimate for revenue is $21.69 billion, a hair above the prior-year period’s $21.66 billion. Gross margin is expected to be roughly flat at about 64.6%.

In a note to clients, RBC Capital Markets said it remains positive on Microsoft, although it believes the inflection point it is looking for in commercial cloud and total company gross margins will be weighted in the second half of fiscal 2017. “Away from this, we see some potential for some positive surprises on [operating expenses], Windows and possibly server-product growth,” the firm said.

RBC said it is looking for sustainability of server products growth including the company’s Server 2016 with new pricing and SQL Server 2016, as well as commercial cloud gross margins close to expanding “materially.” The firm expects a 5 percentage-point improvement in fiscal 2017 from fiscal 2016, but expects the pace of improvement will be weighted toward the second half; and company-wide gross margins inflecting in the second half of fiscal 2017.

The firm noted that excluding foreign exchange, Microsoft’s earnings before interest and taxes grew by 10% and earnings per share rose by 18% in fiscal 2016.

“This is unrivaled at mega-cap peers … and we think Microsoft deserves a premium, especially given our conviction on earnings growth sustainability,” RBC added. The firm has an outperform rating on the stock with a price target of $61 per share.

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