Microsoft Q3 earnings will focus heavily on Azure
This week features a murderers’ row of tech giants including Alphabet and Apple reporting their quarterly results, and one of the most anticipated — who would have thought you’d be reading this 5 years ago — is Microsoft (MSFT).
The company, which is set to report its Q3 2020 earnings on Wednesday, has been a standout among an already dominant tech industry thanks to its Azure cloud services, second only to Amazon (AMZN). But even the most powerful firms have to contend with the new reality wrought by the coronavirus pandemic and its ensuing economic crisis.
Here’s what analysts are expecting from the company in the quarter, as well as how it performed in the same period last year.
In February, Microsoft announced that it would miss its Q3 2020 revenue guidance for its More Personal Computing segment, which consists of sales of its Windows software to OEM partners, as well as sales of its Surface hardware, Gaming segment and search revenue.
The company had already provided a wider than usual guidance range for the segment, which pulled in $13.2 billion in Q2 2020, due to the then evolving coronavirus situation in China. According to a statement, however, Microsoft said its supply chain in the region was returning to normal at a slower pace than expected and that it would miss its forecasted revenue for the division.
Still, the company didn’t revise its overall forecast for the quarter. That’s likely due to the fact that, as more people around the world were told to stay and work from home, Azure and cloud services like Office 365 saw an uptick in usage.
“We see Microsoft as a core holding as a shift to remote work increases consumption of Azure services and speeds Office 365 and Teams adoption, while PC supply constraints negatively impacting Q3 likely bounce back in future quarters,” UBS analyst Jennifer Lowe wrote in a research note.
Microsoft could, however, see a drop in revenue in its on-premises server business, as companies cut back on spending on such major investments. However, according to RBC analyst Alex Zukin, that may not matter for investors who will see a silver lining in Azure performance.
“For MSFT while certain businesses such as on-prem server and tools are likely to see similar impacts to those from SAP and IBM (deal delays, etc.) and Windows (supply chain disruptions and PC demand) we believe investors will largely look beyond these issues as the secular narratives and shifts powering shares for the past two years are likely to be accelerated,” Zukin wrote in a research note.
Looking forward, it’s clear that Azure and the cloud will continue to be key drivers for Microsoft. According to Wedbush analyst Dan Ives, the work from home environment much of the world is dealing with could actually serve as a catalyst for increased spending on Azure and similar platforms in the future.
“To this point, we believe Azure’s cloud momentum is still in its early days of playing out within the company’s massive installed base (current environment a potential catalyst to cloud shift) and the Office 365 transition for both consumer/enterprise is providing growth tailwinds over the next few years,” he wrote in a research note.
We’ll be following Microsoft’s numbers as they cross the wires live after the closing bell. Stay tuned.
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