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Remote Working Wave to Drive Microsoft's (MSFT) Q1 Earnings

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Microsoft (MSFT - Free Report) is set to release first-quarter fiscal 2021 results on Oct 27.

The tech giant is focused on enhancing capabilities of its cloud computing service — Azure, which is likely to have bolstered its adoption. This, in turn, is likely to have contributed to the fiscal first-quarter performance.

Moreover, the latest Azure and Teams focused healthcare deals to combat coronavirus crisis, including partnerships with Nuance Communications (NUAN - Free Report) , remain noteworthy. Besides, during the fiscal first quarter, Microsoft announced the launch of Azure Communications Services platform at Ignite conference.

The company also announced Azure Kubernetes Services (“AKS”) on Azure Stack HCI to support containerized applications at scale on Azure Stack HCI.

These initiatives to strengthen cloud-based capabilities and help enterprises to accelerate digital transformation for clients bodes well.

Besides, Azure’s increased availability in more than 60 announced regions globally is expected to have strengthened Microsoft competitive position in the cloud computing market, which is dominated by Amazon’s (AMZN - Free Report) Amazon Web Services.

Markedly, Azure revenues surged 50% at constant currency on a year-over-year basis in the last reported quarter. The momentum is likely to have continued in the quarter owing to coronavirus crisis-induced solid uptake in cloud computing solutions and digital transformation.

For the fiscal first quarter, Microsoft expects Intelligent Cloud revenues (Azure falls under this segment) between $12.55 billion and $12.8 billion. Continued strength in the consumption and per-user based services is likely to get reflected in Azure's revenues.

The Zacks Consensus Estimate for the Intelligent Cloud segment revenues is currently pegged at $12.731 billion, indicating growth of 17.4% from the year-ago quarter.

Click here to know how the company’s overall Q1 performance is expected to be.

Work-From-Home & Online Learning Push Boost Teams Adoption

The tech giant is incorporating robust machine learning (ML) and artificial intelligence (AI) capabilities in its Microsoft 365 solutions to bolster enterprise productivity, which is likely to have bolstered adoption rate. This is expected to have aided the company to compete with Alphabet’s (GOOGL - Free Report) G-Suite.

Moreover, the company enhanced workspace communication offering, Teams, with a slew of new features, including Together mode, to enable users to work from home seamlessly in the wake of the coronavirus pandemic.

These initiatives are expected to have driven subscriber base, which in turn might have contributed to the fiscal first-quarter performance.

Teams has been witnessing a robust surge in usage courtesy of the coronavirus-induced work-from-home, stay-at-home, telehealth and online learning wave.

Likewise, Office 365 Consumer subscribers have grown consistently in the trailing four quarters, from 35.6 million to 42.7 million. We expect momentum in subscribers to have continued in the to-be-reported quarter, backed by digital transformation in the industry triggered by coronavirus crisis-led work-from-home wave.

Growing clout of the company's offerings instill investor confidence in the stock. Notably, shares of Microsoft, which currently carries a Zacks Rank #2 (Buy), have returned 36.2% year to date, compared with the industry’s rally of 33.5%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

For fiscal first-quarter, Microsoft expects Productivity and Business Processes revenues between $11.65 billion and $11.9 billion, backed by low-double-digit growth in Dynamics and mid-single-digit revenue growth in LinkedIn. Weak job market and lower spend on advertising are likely to have weighed on LinkedIn and Search revenues.

Strong upsell opportunity for Microsoft E5 and momentum in Office 365 may have driven growth in Office commercial. However, decline of 30% in on-premises business, owing to sluggishness in transactional business across small and medium businesses is anticipated to affect growth.

Office consumer revenues are expected to have remained unchanged on a year-over-year basis as growth in subscription-based offerings mitigated the decline in transactional business, per management.

The Zacks Consensus Estimate for revenues for the Productivity and Business Processes segment is currently pegged at $11.819 billion, indicating an improvement of 6.7% from the prior-year quarter.

Uptick in PC Shipments & Solid Office Equipment Demand Bode Well

Improving PC shipments in the third quarter of calendar year 2020, driven by increased demand and improvement in the supply chain, is likely to have contributed to the company’s More Personal Computing segmental performance in the fiscal first quarter. Per Gartner’s preliminary data, PC shipments in third-quarter 2020 improved 3.6% year over year to 71.4 million units.

Besides, work-from-home and stay-at-home induced online learning trends in the wake of coronavirus-led lockdown has been boosting demand for office equipment. This is likely to have generated incremental revenues from Surface devices in the to-be-reported quarter.

In the gaming vertical, the tech giant is expected to have benefited from an increase in Xbox Live monthly active users and the adoption of Game Pass subscriptions as apprehensions regarding the second wave of coronavirus compel people to stay home, which in turn triggered demand for online gaming solutions. The acquisition of ZeniMax Media deserves a special mention and is anticipated to aid the company strengthen its position in the console gaming market.

Microsoft expects More Personal Computing revenues (comprising Windows, Gaming, Devices and Search businesses) between $10.95 billion and $11.35 billion. The company anticipates OEM revenues to decline in low teens owing to weakness across small and medium businesses.

Windows commercial products and cloud services revenues are expected to grow in “healthy double-digits” driven by solid Microsoft 365 momentum and advanced security solutions. Surface revenues are anticipated to increase in the “mid-teens” year over year. Search advertising revenues, excluding traffic acquisition costs (TAC), are expected to decline “in the low 20% range.”

Meanwhile, Gaming revenues are anticipated to be up in the high-teens year over year on momentum in user engagement.

The Zacks Consensus Estimate for revenues for the More Personal Computing segment is currently pegged at $11.195 billion, indicating growth of 0.6% on a year-over-year basis.

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