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Microsoft's (MSFT) Cloud & Azure Adoption to Aid Q4 Earnings

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Microsoft Corp. (MSFT - Free Report) is set to report fourth-quarter 2019 results on Jul 18.

Notably, the company has an average positive earnings surprise of 9.8% in the trailing four quarters. In the last reported quarter, IBM delivered a positive earnings surprise of 14%.

Past-Quarter Performance

Microsoft delivered third-quarter fiscal 2019 earnings of $1.14 per share, which beat the Zacks Consensus Estimate of $1.00 per share. The figure surged 20% on a year-over-year basis.

Revenues of $30.57 billion increased 14% from the year-ago quarter (up 16% in constant currency or cc). The figure also surpassed the Zacks Consensus Estimate of $29.78 billion.

What to expect in Q4?

The Zacks Consensus Estimate for fourth-quarter earnings is pegged at $1.21 per share, unchanged for the last 30 days. This indicates an improvement of about 7.1% from year-ago earnings. The Zacks Consensus Estimate for quarterly estimate stands at $32.73 billion, suggesting growth of 8.8% year over year.

Microsoft returned 32.4% in the past year, outperforming the industry’s rally of 26.6%.

Let’s see how things are shaping up prior to this announcement.

 Factors at Play

Momentum in Microsoft’s cloud computing service — Azure — is likely to drive growth in the to-be-reported quarter. We believe robust execution and better-than-expected demand from customers for hybrid cloud offerings is likely to act as another tailwind. Notably, Azure revenues soared 75% at constant currency on a year-over-year basis in the last reported quarter.

The company added many new capabilities to Azure, with focus on existing workloads like security and new workloads like IoT and Edge AI. Microsoft had rolled out its HoloLens 2 mixed-reality (MR) headsets and demonstrated use cases at the MWC 2019. The other major takeaways from the event include the roll out of Azure Kinect and Azure Spatial Anchors.

Azure's revenue growth is likely to display continued strength in consumption and per-user based services, which in turn will aid the company’s top line in the quarter under review.

Further, Microsoft is leaving no stone unturned to integrate cloud capabilities of Azure into its gaming segment. This in turn is aiding the company in innovation and expansion beyond exclusive gaming content on X-box consoles.

In this regard, Microsoft and Sony Corp. (SNE - Free Report) recently signed a memorandum of understanding (MoU). Per the deal, the companies will explore the utility of Azure cloud computing capabilities to provide immersive gaming experience to the end user.

We believe Microsoft’s domain expertise in gaming and strength in Azure sets it apart from peers in both cloud and gaming sectors. The same also poises the company well to capitalize on the cloud gaming market. We believe Microsoft’s Azure adoption will help in expanding customer base and bolster the top line in the fourth- quarter.

Strategic Alliancesto Boost Azure Adoption

Microsoft recently partnered with Providence St. Joseph Health to migrate the latter’s health records from numerous data centers to the cloud.

The company also expanded partnership with ServiceNow with an aim to accelerate digital transformation. With the partnership, Microsoft and ServiceNow are focusing on enhancing their portfolio with more intelligence and cognitive capabilities. This in turn will lead to incremental adoption of Now Platform, Microsoft 365 and Azure, benefiting the top line of the company.

The company recently also announced a slew of partner updates and enhancements to Teams, Azure and Dynamics 365. Management remains elated that Teams registered daily active user count of 13 million and weekly active users of around 19 million.

The company rolled out new features in Teams that enable support to firstline workers and healthcare institutions. The features are anticipated to aid Microsoft in upping the game against Splunk, Cisco’s Webex Teams, among others, in collaborative platforms domain.

With an aim to capitalize on this opportunity and expand partner base, the company announced investments and product enhancements. For instance, Microsoft is enabling partners to utilize Microsoft Security competency, latest Azure specializations, and advancements in marketplace, to mention a few.

Further, Microsoft recently entered into a cloud “interoperability” partnership with Oracle. Microsoft and Oracle introduced new cloud capabilities to allow enterprises capitalize on the interconnected cloud platforms.

We believe this is a noteworthy development in the enterprise cloud market. Collectively, with added capabilities Azure and Oracle Cloud platforms are likely to gain a competitive edge over Amazon’s cloud computing platform Amazon Web Services (AWS). The aforementioned steps are likely to the aid the upcoming quarterly results and in the days ahead.

Expanding portfolio is a major growth driver. The company is incorporating AI capabilities in its Office 365 solutions, which are also expected to boost the top line in the to-be-reported quarter.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Microsoft has an Earnings ESP of -1.65% and a Zacks Rank #3.

Stocks to Consider

Here are some stocks which you may consider as our model shows that these have the right combination of elements to post an earnings beat in its upcoming release:

Netflix, Inc. (NFLX - Free Report) has an Earnings ESP of +5.99% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

AT&T Inc. (T - Free Report) has an Earnings ESP of +0.46% and a Zacks Rank #3.

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Microsoft Corporation (MSFT) - free report >>