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Microsoft’s Earnings for Q1: Four Key Factors to Watch


Oct. 23 2019, Updated 1:26 p.m. ET

Microsoft’s earnings for the first quarter of fiscal 2020 are expected to be released after the market closes today. Investors expect upbeat Microsoft (MSFT) earnings driven by its robust cloud-computing business.

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Microsoft’s earnings

Microsoft expects its Intelligent Cloud revenue to reach $10.3 billion–$10.5 billion or the first quarter of fiscal 2020.  Meanwhile, its estimate for the Productivity and Business Processes segment is $10.7 billion–$10.9 billion.

In its fourth-quarter earnings call, the company guided for its Q1 COGS (cost of goods sold) to be $10.55 billion–$10.75 billion. Its guidance for operating expenses was $10.1 billion–$10.2 billion.

Apart from the overall numbers, there are a couple of essential factors that investors must consider. Here’s a quick look at the four most crucial things to look at as Microsoft releases its Q1 earnings.

Microsoft: Growth in Azure revenue

The revenue from Intelligent Cloud has been on a roll and contributes significantly to Microsoft’s revenue and profitability. In the fourth quarter, Azure revenue grew 64% amid robust growth in consumption-based business.

Microsoft also expects substantial Azure revenue for Q1 of fiscal 2020. Nomura analyst Christopher Eberle expects the Azure business to grow 61.6% in the first quarter

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Rise in long-term Azure deals

We expect Microsoft’s cloud business to be the key driver of the company’s growth. So, it’s essential to keep an eye on the number of Azure deals that could be signed shortly.

Azure’s commercial bookings for the fourth quarter grew 22% year-over-year, or 25% in constant currency terms. This growth was on the back of renewals as well as large Azure deals. Microsoft CFO Amy Hood noted that the company plans to recognize 50% of the $91 billion contracted revenue in the next 12 months. A portion of its impact might be seen in its first-quarter numbers.

From June to September, Microsoft signed several large deals, the most significant one being AT&T. In July, Microsoft announced its deal with the telecom giant, which is worth more than $2 billion. According to the agreement, AT&T (T) plans to leverage the Azure infrastructure and shift most of its employees to the Microsoft 365 package.

In August, Microsoft signed a long-term contract with India’s Reliance Jio. The deal aims to allow small and medium businesses to have better access to cloud-based productivity. Microsoft seeks to benefit from the potential growth of small and medium enterprises in India.

In September, Chevron, Schlumberger, and Microsoft announced an alliance to accelerate the development of digital technologies for the energy sector.

The financial terms of the Chevron and Reliance Jio deals are not known. However, Microsoft wants to focus on multimillion-dollar deals. In the company’s Q4 earnings call, Microsoft CEO Satya Nadella said, “We have line of sight to many more such deals.”

According to MarketWatch, J.P. Morgan analysts hinted that Microsoft might have inked an Azure deal “with a large American Media & Entertainment company” that was “similar in size” to the AT&T contract.

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Windows OEM revenue trend

The Windows 7 end of life has paved the way for migration to Windows 10, which has been driving its OEM revenue growth. The first quarter of fiscal 2020 is one of the last two quarters to see the impact of this migration, as Windows 7 will expire on January 14, 2020. Most of the large enterprises are accelerating their upgrades to Windows 10, which led to increased PC shipments in the third quarter of fiscal 2020. As a result, we may continue to see Windows 10–driven growth for the first quarter of fiscal 2020 as well.

MarketWatch noted that Instinet analysts mentioned, “We expect upside from migration to Win 10 to continue for several quarters.” MarketWatch added that Morgan Stanley expects a 5% rise in Windows OEM revenue in the second half of fiscal 2020. Overall, Microsoft expects its Personal Computing revenue to reach $10.7 billion–$11.0 billion in the first quarter.

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Gaming: Xbox Live monthly active users

Microsoft’s gaming revenue is expected to mirror its performance in the fourth quarter. The company expects its gaming segment revenue to report a similar rate of annual decline as in Q4 of fiscal 2019. The decline in console sales is due to the imminent end of life of the current-generation console.

The next-generation console Xbox Scarlett could hit the market in the 2020 holiday season. However, the company expects its gaming revenue to rebound in the second half of fiscal 2020 on the back of third-party sales.

As projected by the company in its earnings call, it launched Project xCloud for public testing last week. Investors should watch for the metric of Xbox Live’s monthly active users. In Q4 of fiscal 2019, the number of Xbox Live monthly active users climbed to 65 million from 57 million in the fourth quarter of fiscal 2018. These numbers denote gamers who used the service within the previous month and signify user engagement.

Microsoft (MSFT) stock has soared nearly 36% in 2019, and it’s trading 4.2% below its 52-week high. We’ll watch closely to see whether the stock continues on its bull run after its earnings release


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