All eyes will be on Microsoft (MSFT) when it reports its Q4 FY20 results after the bell on Wednesday. Investors would be curious to see how the coronavirus outbreak impacted the software giant’s business during the quarter. So, to get a fuller picture of its state of finances and operations, investors should monitor its Surface, LinkedIn, and Azure growth rates, along with tracking its segment performance and listening in on its management’s outlook for FY21. These items are likely going to determine how Microsoft and its shares will perform over the coming months. Let’s take a closer look at it all.
Let me start by saying that Microsoft doesn’t reveal sales figures for its Azure division but it does, however, report revenue growth figures for the platform with each passing quarter. I believe this growth figure should be on investors’ radar when the company announces its Q3 FY20 results as it’ll highlight how well its cloud platform is performing.
There are two reasons why Azure is so important. First, it has grown to become a significant growth driver for Microsoft. We at Business Quant, estimate that Azure generated about $13 billion in revenue during FY19 – roughly accounting for over 10% of the software giant’s total revenue in the period. Analyst estimates for the same go as high as $20 billion.
Secondly, Daniel Ives of Wedbush noted the “vast majority of Microsoft’s revenue and 80% to 90% of the company’s valuation is based on Azure, Office 365, and core enterprise-driven franchise.” This is all the more reason for us to track Azure’s sales growth momentum in Microsoft’s upcoming earnings report.
There are potentially four outcomes:
1. Azure’s sales growth accelerates while AWS’ decelerates. This would imply that Microsoft’s cloud platform is gaining ground against its larger rival.
2. Azure’s sales growth decelerates while AWS’ accelerates. This would lend credence to slowdown-related concerns surrounding Microsoft.
3. Both Azure and AWS post an acceleration in their Q2 CY20 revenue growth rates, meaning that both the platforms are benefiting from industry tailwinds.
4. Both Azure and AWS post a deceleration in their Q2 CY20 revenue growth rates, thereby suggesting that both the platforms are experiencing industry headwinds and maybe industry-wide adoption of public cloud platforms is hitting a saturation point.
The monthly sales tracker at Business Quant reveals that cloud-centric companies registered a sales growth acceleration in April, May, and June. With Azure’s rapidly growing revenue base, it’s very unlikely that it’ll revisit its prior 70%-plus growth rates. So, expecting its sales growth momentum to accelerate only by a modest 100 to 400 basis points for now.
Other Hot Divisions:
Moving on, investors may also want to scrutinize Microsoft’s Surface and LinkedIn revenues. Starting with LinkedIn, the platform has consistently posted sequential revenue growth in every quarter since 2016, except for the last quarter.
Granted that LinkedIn’s Q3 FY20 revenues grew by over 20% year on year, which is great, but Microsoft’s management did acknowledge during its last earnings call that lower advertising spend restricted the growth of its LinkedIn revenues during the quarter.
Next, Microsoft had updated and expanded its portfolio of Surface devices back in the holiday season but the division’s revenue barely grew on a year-on-year basis during Q3 FY20. I suspect the measly sales growth was due to logistics-related challenges in the last quarter.
Microsoft’s Q4 FY20 may prove to be different for its Surface division this time around. IDC estimates that PC shipments grew by over 11% during the quarter, whereas Canalys estimates the figure to be at 9%. The two research firms may have different growth estimates for the market segment, but both firms seem to agree that the recent shift to work-from-home culture has caused a surge in PC demand across the globe.
Lastly, analysts are estimating Microsoft’s Q4 FY20 results to come in at $36.49 billion, which would mark a year-on-year growth of 8.2%. Microsoft has outperformed the Street’s revenue estimates in all 5 of its last 5 quarters; so from a statistical standpoint, it’s likely to outperform once again.
But as far as guidance goes, Microsoft’s management had guided its Q4 FY20 revenues to amount to $36.32 billion in its last earnings call, which is more or less in line with the Street’s revenue estimates.
Microsoft’s upcoming earnings report will be a critical moment for the company and its shareholders. It’ll provide us with clarity on Microsoft’s near-term growth prospects amidst the current uncertain economic environment. I would recommend readers and investors to monitor its Azure, Surface, and LinkedIn sales growth momentum, listen in on its management’s outlook for FY21, and scrutinize its segment performance. These items will provide us with clarity around Microsoft’s state of operations and its growth prospects in the COVID-19 era.
Microsoft LONG (Buy)
ENTER AT: 217.21