Q3 earnings preview: Microsoft (MSFT) can weather the economic uncertainty

The technology bellwethers are expected to report their recently ended quarter results this week, including Alphabet (NASDAQ: GOOG, GOOGL) tomorrow, Facebook (NASDAQ: FB) and Microsoft (NASDAQ: MSFT) on Wednesday, followed by Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL) on Thursday. Software giant Microsoft is expected to report its third-quarter 2020 earnings on Wednesday after the markets wind up. Out of these five big techies, Alphabet has returned negative 5%, Facebook had dropped 9%, Apple declined 4%, Microsoft increased 10% and Amazon topped with a 29% increase since the beginning of this year. Meanwhile, the S&P 500 index had slipped about 11% in the year-to-date period. Even though Microsoft had faced certain disruptions due to the global health crisis, market watchers expect that Microsoft will weather this situation without much hiccups.

Looking back

Microsoft has surprised the investing community with strong positive earnings in each of the past four quarters. For the second quarter, the Redmond-based company posted strong top and bottom-line numbers. Azure revenue had a stellar growth of 62%, while Xbox Content & Services revenue dipped 11% in the quarter.

Street’s expectations

Like last quarter, revenue from Intelligent Cloud and Productivity and Business Processes are expected to be strong and healthy in the to-be-reported quarter. Even though Amazon’s AWS has got the upper hand, growth in Azure is expected to continue at the same pace. Even after the negative impacts caused by the COVID-19, analysts view the tech firm to report earnings of $1.28 per share on revenue of $33.88 billion for the March quarter. This compares with the earnings of $1.14 per share and revenue of $30.6 billion in the third quarter of 2019.

Advantages

The global pandemic has resulted in social distancing and stay-at-home orders all over the world. From last month, there has been an increase in telecommuting, online education, and gaming, which led to an increase in demand for cloud computing and communication platforms like Microsoft 365. Microsoft’s Teams app, a workspace collaborative platform that competes with Slack, has gained traction in recent times. COVID-19 also had increased the sales of the company’s laptops and notebooks and the usage of Windows Virtual Desktop.

Today, Coca-Cola (NYSE: KO) signed a five-year deal with Microsoft for an undisclosed amount to use the capabilities of Microsoft Azure, Dynamics 365 and Microsoft 365.

Q3 guidance

During the second quarter of the fiscal year 2020 earnings call, Microsoft issued quarterly revenue guidance for More Personal Computing segment between $10.75 billion and $11.15 billion, which included a wider than usual range to reflect uncertainty related to the public health situation in China. In February end, the company announced that it does not expect to meet More Personal Computing segment guidance announced in January as Windows OEM and Surface are more negatively impacted than previously anticipated. The supply chain was returning to normal operations at a slower pace than anticipated at the time of the Q2 call. All other components of Q3 guidance remained unchanged.

In Q3, revenue from Productivity and Business Processes segment is projected to be between $11.5 billion and $11.7 billion driven by continued double-digit growth across Office commercial, Dynamics, and LinkedIn. For Intelligent Cloud, revenue is targeted between $11.85 billion and $12.05 billion. In Azure, revenue growth was eyed to be strong in consumption-based business and moderating growth in per-user business, given the size of the installed base. Growth in on-premises server business is estimated to be in high single digits, driven by strong hybrid demand, as well as some continued benefit related to the end of support for Windows Server 2008.

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For Windows commercial products and cloud services business, Microsoft had projected another quarter of healthy double-digit revenue growth in Q3. Gaming revenue is estimated to decline in the low double-digit range. At the company level, Microsoft had guided double-digit revenue and operating income growth for fiscal 2020, driven by the continued strength of the commercial business.

When most of the US companies have suspended their quarterly dividends and share repurchases, Microsoft continued to issue its quarterly dividend. With a strong cash position, strength in the cloud business, and the ability to return shareholders, it is expected that Microsoft will not get affected much by the COVID-19 pandemic and also it will overcome the challenges caused by the pandemic in a swift manner.