North America

Earnings Preview: Microsoft Q2 2018 (MSFT)

By: Craig Bowles

Overview

Microsoft, Corp. (MSFT) is slated to report 2Q2018 earnings after the close on Wednesday, January 31st. The earnings release is expected at approximately 4:05 p.m. ET with a conference call to follow at 5:30 p.m. that is webcast through Microsoft Investor Relations. A member of the Dow Jones Industrial Average, Microsoft has significant market influence and the potential to impact the broader market gauges.

Outliers & Strategy

Key measures:

  • Adjusted Earnings Per Share (EPS) / Non-GAAP Earnings Per Share (EPS): (If unavailable, GAAP Earnings Per Share (EPS) would be comparable to consensus.) The Street estimate is $0.86 (range $0.83 to $0.91). (Source: Yahoo! Finance) Consensus was $0.83 three months ago.
  • Revenues: Analysts expect an increase of 8.9% y/y to $28.39 bln (range $28.07 bln to $28.79 bln).
  • Price/Earnings of 32.4 compared to a 5-year average of 23.8; P/Book 7.9 compared to a 5-year average of 5.1, P/Sales 7.7 compared to a 5-year average of 4.7, and P/Cash Flow 17.7 compared to a 5-year average of 13.7. Dividend yield of 1.7% compared to a 5-year average of 2.3%.
  • Analysts view Microsoft with 26 Buy, 8 Hold, and 2 Sell ratings. (source: MarketBeat.com)
  • Insider sold 131,505 shares during the last three months and 45,881,638 shares in the past year. (source: NASDAQ.com) The company approved another $40 bln stock buyback program that began in 2017. Microsoft again raised its dividend 8% to 42 cents.
  • Microsoft is compared to other software and service companies with quarterly results possibly impacting Apple (AAPL), Google (GOOGL) and Oracle (ORCL).
  • Microsoft shares have shown a 1-day average price change on earnings of 4.01%. Options are pricing in an implied move of 4.94% off earnings.

Recent News

  • 1/25: JP Morgan’s survey of 30 Microsoft partners produced “healthy” results and upbeat outlooks for 2018, according to a post on Marketwatch.com.
  • 1/25: Canaccord Genuity is bullish intermediate and long-term on Microsoft citing a belief that newer parts of the company’s business, such as its “Office 365” online suite, become a larger and larger part of its total revenue, pushing the company’s market capitalization above one trillion dollars, according to a post on Barron’s.com.
  • 1/24: Microsoft made a major move toward Netflix-style subscriptions for Xbox games, according to a post on Businessinsider.com.
  • 1/23: Microsoft carried out what is being described as a “small round” of layoffs in its corporate offices, according to a post on Windows Central.
  • 1/22: Two of Microsoft’s official distributors in Russia have imposed restrictions on sales of Microsoft software to more than 200 Russian companies following new U.S. sanctions, according to a post on Reuters.
  • 1/22: Leveraging the booming corporate trend toward digital transformation, Microsoft implemented a strategy to drive additional cloud revenue for Azure and Dynamics 365 by giving Microsoft salespeople big financial rewards for sharing leads with partners and enabling corporate customers to resell Azure IP they’ve developed in-house, according to a post on Forbes.com.
  • 1/21: Microsoft-owned “Minecraft” is still one of the biggest games in the world, with nearly 75 million people playing monthly, according to a post on Businessinsider.com.
  • 1/09: Microsoft said most Windows 7 and Windows 8 users relying on older chips will notice the performance impact of updates to protect against Meltdown and Spectre, according to a post on CNBC.com.
  • 12/12: Bernstein has an Outperform rating on Microsoft after surveying 105 chief information officers in the U.S. and Europe. The Azure unit may now have a higher customer count among enterprise users than does Amazon’s (AMZN) AWS service customers with potential revenue y/y growth of 90% each quarter for several quarters, according to a post on Barron’s.com.

Summary

Microsoft stock has led the overall market higher since mid-2016. Increased revenue expectations seem to be driving the stock higher despite valuations appearing stretched. Analyst bullishness remains and insider selling suddenly slowed recently. Over the past year, Microsoft has beaten analyst consensus by an average of 12c the past four quarters. Estimize consensus for an EPS (or adjusted EPS) of $0.89 on revenue of $28.50 bln compares to analyst consensus of $0.86 on revenue of $28.39 bln.

 

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