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Azure, Teams & Xbox Adoption to Aid Microsoft (MSFT) Q2 Earnings

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Microsoft (MSFT - Free Report) is slated to release second-quarter fiscal 2021 results on Jan 26.

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, might have contributed to the fiscal second-quarter performance.

Moreover, the latest Azure focused collaborations with Accenture, Rockwell Automation, and Adobe (ADBE - Free Report) , remain noteworthy. Besides, momentum in Azure Communications Services platform, which was launched during the fiscal first quarter, is expected to have driven growth.

These initiatives to strengthen cloud-based capabilities and help enterprises to accelerate digital transformation for clients bodes well. The company’s strength in latest Azure Kubernetes Services (“AKS”) offering on Azure Stack HCI to support containerized applications at scale on Azure Stack HCI may have acted as a tailwind.

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 47% 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 second quarter, Microsoft expects Intelligent Cloud revenues (Azure falls under this segment) between $13.55 billion and $13.8 billion. Continued strength in the consumption and per-user based services is likely to get reflected in Azure's to-be-reported quarter’s revenues.

The Zacks Consensus Estimate for the Intelligent Cloud segment revenues is currently pegged at $13.755 billion, indicating growth of 15.9% from the year-ago quarter.

Click here to know how the company’s overall fiscal second quarter performance is expected to be.

Work-From-Home & Online Learning Push Favor 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 driven adoption rate. This is expected to have aided the company to compete with Alphabet’s (GOOGL - Free Report) G-Suite.

Moreover, Microsoft, which currently carries a Zacks Rank #3 (Hold), has 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. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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. Also, integration of Teams with Microsoft’s various inhouse offerings including PowerPoint presentations, SharePoint, Stream, Dynamics 365 makes collaboration easy and engaging, while simultaneously driving outcomes and saving time.

These initiatives are expected to have driven subscriber base, which in turn might have contributed to the fiscal second-quarter performance. Notably, in first-quarter fiscal 2021, the company noted that Microsoft Teams had daily active user base of 115 million.

Likewise, Microsoft 365 Consumer subscribers have grown consistently in the trailing four quarters to 45.3 million from 37.2 million (Office 365). 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.

For the fiscal second quarter, Microsoft expects Productivity and Business Processes revenues between $12.75 billion and $13 billion, backed by continued Dynamics 365 momentum and growth in LinkedIn courtesy of recovery in advertising market and continued strong engagement on the platform. However, weak job market is likely to have weighed on LinkedIn 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, due to sluggishness in transactional business across small and medium businesses is anticipated to have affected growth.

The Zacks Consensus Estimate for revenues for the Productivity and Business Processes segment is currently pegged at $12.901 billion, indicating an improvement of 9.1% from the prior-year quarter.

Uptick in PC Shipments & New Xbox Launches In Holiday Season

Improving PC shipments in the fourth quarter of calendar year 2020, driven by increased consumer demand and improvement in the supply chain, is likely to have contributed to the company’s More Personal Computing segmental performance in the fiscal second quarter. Per Gartner’s preliminary data, PC shipments in third-quarter 2020 improved 10.7% year over year to 79.4 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 incremgental revenues from Surface devices in the to-be-reported quarter.

Talking about gaming business, the tech giant expects Gaming revenues to be up in the high 20% range year over year on solid demand following the holiday season launch of next generation Xbox Series X and S consoles. This, in turn, is projected to boost hardware revenue growth of approximately 40%.

Management anticipates Xbox content and services revenue to grow in the low 20% range, on strong engagement and continued uptick in GamePass subscribers.

Apprehensions regarding the new mutant of coronavirus, which has been persuading people to stay home, has triggered demand for online gaming solutions. This, in turn, is likely to have led to an increase in Xbox Live monthly active users.

However, increasing investments on enhancing life-time value of the new console platforms, is anticipated to have negatively impacted gross margin.

In Windows commercial products and cloud services business, annuity billings are expected to witness “healthy” growth driven by solid momentum in advanced security solutions.

The company expects overall revenues from Windows to decline in the high single digit range. The company anticipates OEM revenues to witness strong growth in OEM non-Pro. However, OEM Pro business might have been affected by the lower commercial demand.

Surface revenues are anticipated to remain flat on a year-over-year basis. Search advertising revenues, excluding traffic acquisition costs (TAC), are anticipated to decline “the mid to high-single digit range.”

Microsoft expects More Personal Computing revenues (comprising Windows, Gaming, Devices and Search businesses) between $13.2 billion and $13.6 billion.

The Zacks Consensus Estimate for revenues for the More Personal Computing segment is currently pegged at $13.499 billion, indicating growth of 2.2% on a year-over-year basis.

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