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Azure, Teams & Xbox Adoption to Aid Microsoft (MSFT) Q3 Earnings

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Microsoft (MSFT - Free Report) is scheduled to report third-quarter fiscal 2021 results on Apr 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, might have contributed to the fiscal third-quarter performance.

Moreover, momentum in Azure Communications Services platform, which was launched during the fiscal first quarter, is expected to have driven growth. Besides the latest Azure focused collaborations with Amadeus and Volkswagen Group's software company Car.Software Organisation remain noteworthy.

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

In addition, Azure’s increased availability in more than 60 announced regions globally is anticipated 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 48% 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 third quarter, Microsoft expects Intelligent Cloud revenues (Azure falls under this segment) between $14.7 billion and $14.95 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 $14.935 billion, indicating growth of 21.6% from the year-ago quarter.

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

Remote Work & Online Learning Trends 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 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 #2 (Buy), 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 third-quarter performance. Notably, in second-quarter fiscal 2021 earnings conference, the company noted that Microsoft Teams had daily active user base of 60 million on mobile alone.

Likewise, Microsoft 365 Consumer subscribers have grown consistently in the trailing four quarters to 47.5 million from 39.6 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 third quarter, Microsoft expects Productivity and Business Processes revenues between $13.35 billion and $13.6 billion, backed by continued Dynamics 365 momentum and growth in LinkedIn courtesy of recovery in advertising market and continued strong engagement on the platform.

Strong upsell opportunity for Microsoft E5 and momentum in Office 365 is expected to have driven growth in Office commercial. Notably, AT&T (T - Free Report) , Amgen, Daimler, GSK, and IKEA have selected Microsoft 365 E5, powered by differentiated security, compliance, voice, and analytics capabilities.

However, on-premises business is anticipated to decline in the mid to high-teens range, on account of the ongoing customer shift to Office 365, despite projected improvement in transactional business. This, in turn, is anticipated to have affected growth.

The Zacks Consensus Estimate for revenues for the Productivity and Business Processes segment is currently pegged at $13.488 billion, indicating an improvement of 14.9% from the prior-year quarter.

Growth in PC Shipments & Solid Demand for New Xbox

Improving PC shipments in the first quarter of calendar year 2021, driven by increased consumer demand on remote work and online learning trends, is likely to have contributed to the company’s More Personal Computing segmental performance in the fiscal third quarter. Per Gartner’s preliminary data, PC shipments in first-quarter 2021 improved 32% year over year to 69.9 million units.

Besides, work-from-home and stay-at-home induced online learning trends in the wake of coronavirus-led lockdown have been boosting demand for office equipment. This is likely to have generated incremental revenues from Surface devices in the to-be-reported quarter. Per management, Surface revenues are anticipated to improve in the mid to high-teens range on a year-over-year basis.

Talking about gaming business, the tech giant expects gaming revenues to be up 40% year over year on solid demand of the next generation Xbox Series X and S consoles. Xbox content and services revenue are projected to grow in the mid-20% range, on strong engagement and continued uptick in GamePass subscribers.

Apprehensions regarding the new mutant of coronavirus, which has been compelling 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, growth is anticipated in the low to mid-teens driven by solid momentum in Microsoft 365 and advanced security solutions. The company expects overall Windows OEM revenues to grow in the low-single digits range.

Search advertising revenues, excluding traffic acquisition costs (TAC), are anticipated to grow on improving advertising market.

Microsoft expects More Personal Computing revenues (comprising Windows, Gaming, Devices and Search businesses) between $12.3 billion and $12.7 billion.

The Zacks Consensus Estimate for revenues for the More Personal Computing segment is currently pegged at $12.555 billion, indicating growth of 14.2% on a year-over-year basis.

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