Credit: Shutterstock photoShares of Microsoft MSFT dipped nearly 1% during Tuesday morning trading hours. Nevertheless, the technology giant is carrying relatively strong momentum into its earnings report date on Wednesday afternoon-a day that could prove to be another telling moment in company history.
Microsoft's latest quarterly earnings announcement is significant because the company finds itself in the middle of major shift in focus. The decline of the PC over the past several years has been well documented, and we know that this put Microsoft-known for its Windows operating system-in a tricky situation.
Microsoft needed to find a way to cash in on the growth of other major tech trends while loosening its dependence on its PC software-focused business model. In many ways, the company has done just that.
The Redmond, Washington-based firm moved to a "freemium" model with Windows 10, offering the new OS as a free upgrade and focusing on the monetization of compatible apps and services. Meanwhile, its Azure cloud computing platform-which helps enterprises build, deploy, and manage applications and web services through Microsoft's own network of data centers-has exploded recently.
All of this development has helped cement Microsoft's position as a leader in the current generation of technology. But what should investors expect from the company when it reports later this week? Let's take a closer look.
Latest Outlook
Based on our latest Zacks Consensus Estimates, we expect Microsoft to report quarterly earnings of $0.86 per share and revenues of $28.35 billion. These results would represent year-over-year growth of 3.6% and 8.8%, respectively.
But of course, total earnings and revenue are just two of the many things investors will be looking at when Microsoft reports on Wednesday. In fact, it is likely that the company's post-earnings momentum is at least partially inspired by its results in its individual business segments.
To prepare for this, we can turn to our exclusive non-financial metrics consensus estimate file. The Zacks Consensus NFM file contains detailed estimate data for business segment metrics and non-financial metrics reported by companies. The data is acquired from digest and contributing broker models and includes the independent research of expert stock market analysts.
Our consensus estimate file is currently calling for Microsoft's Productivity & Business Processes revenues to grow about 20.3% to touch $8.877 billion for the quarter. Year-over-year comparisons in for this unit will benefit from the company's acquisition of LinkedIn, which closed in Dec. 2016.
Meanwhile, our NFM file is projecting that Microsoft will report Intelligent Cloud revenues of $7.501 billion, which would represent year-over-year growth of about 9.3%. The Intelligent Cloud unit includes Azure, so we can expect this to be the major catalyst here.
Finally, our latest consensus estimates are calling for Microsoft to post More Personal Computing revenues of $12.012 billion. This result would represent modest growth of about 1.6%. The MPC segment has struggled recently, primarily due to the aforementioned slump in global PC demand. Any growth here is encouraging, but investors should expect expansion to be slow.
Earnings ESP Whispers
Investors will also want to anticipate the likelihood that Microsoft surprises investors with better-than-anticipated earnings results. For this, we turn to our Earnings ESP figure.
Zacks Earnings ESP (Expected Surprise Prediction) looks to find earnings surprises by focusing on the most recent analyst estimates. This is done because, generally speaking, when an analyst posts an estimate right before an earnings release, it means that they have fresh information which could potentially be more accurate than what analysts thought about a company two or three months ago.
A positive Earnings ESP paired with a Zacks Rank #3 (Hold) or better ranking helps us feel confident about the potential for an earnings beat. In fact, our 10-year backtest has revealed that this methodology has accurately produced a positive surprise 70% of the time.
Heading into its report date, Microsoft is currently sporting a Zacks Rank #3 (Hold) and an Earnings ESP of 0.41%. This is because the company's Most Accurate Estimate for earnings sits at $0.87 per share, meaning that the most recent analyst estimates have been higher than the consensus. This improved outlook is a good sign heading into the report.
Price Performance and Surprise History
Another important thing to consider ahead of Microsoft's report is the company's history of earnings surprises and the effect that these surprises have had on share prices.
Microsoft Corporation Price, Consensus and EPS Surprise
Microsoft Corporation Price, Consensus and EPS Surprise | Microsoft Corporation Quote
As we can see, Microsoft has successfully met or surpassed earnings estimates in six-consecutive quarters. However, a positive earnings surprise has not always led to an immediate share price surge. In some recent cases, post-earnings momentum has taken a bit of time to generate.
It is likely that investors will react strongly to anything Microsoft says about guidance. Another thing to remember is that most tech firms have been taking one-time charges related to the recent U.S. tax reform bill. These charges have led to major differences between adjusted and GAAP earnings figures, but they have also inspired favorable forward-looking earnings guidance.
Want more analysis from this author? Make sure to follow @Ryan_McQueeneyon Twitter!
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
