North America

Earnings Preview: Microsoft Q4 2017 (MSFT)

By: Craig Bowles

Overview

Microsoft, Corp. (MSFT) is slated to report 4Q2017 earnings after the close on Thursday, July 20th. 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 $0.71 (range $0.67 to $0.78). (Source: Yahoo! Finance) Consensus was $0.68 three months ago.
  • Revenues: Analysts expect an increase of 7.2% y/y to $24.26 bln (range $24.08 bln to $24.50 bln).
  • Price/Earnings of 31.6 compared to a 5-year average of 20.5; P/Book 7.9 compared to a 5-year average of 4.3, P/Sales 6.5 compared to a 5-year average of 4.1, and P/Cash Flow 15.3 compared to a 5-year average of 12.7. Dividend yield of 2.1% compared to a 5-year average of 2.6%.
  • Analysts view Microsoft with 26 Buy, 8 Hold, and 2 Sell ratings. (source: MarketBeat.com)
  • Insider sold 15,056,164 shares during the last three months and 72,745,814 shares in the past year. (source: NASDAQ.com) The company approved another $40 bln stock buyback program that began in 2017. Microsoft also raised its dividend 8% to 39 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 5.48%. Options are pricing in an implied move of 3.58% off earnings.

Recent News

  • 07/07: Stifel Nicolaus reiterated a Buy rating on Microsoft after reports that the company is laying off as many as 3,000 employees mostly in sales. If true, that would be 10% of the company’s global 30,000 sales force and 3% of the company total of 121,000, so “a relatively small headcount reduction,”, according to a post on Barron’s.com.
  • 06/27: Box, Inc. (BOX) and Microsoft announced an expanded partnership to jointly offer Box cloud content management with Azure to enterprise customers, according to a post on StreetInsider.com.
  • 06/22: Cleveland Research initiated coverage on Microsoft with a Buy rating citing research showing MSFT bringing more business under contract and deal sizes improving. “We see potential for improving Office 365 mix and Azure and Dynamics share gains to drive for 4-5% upside to cons rev estimates through FY19,”, according to a post on StreetInsider.com.
  • 06/19: Morgan Stanley maintained an Overweight rating on Microsoft citing a strengthening secular positioning and a return to double-digit EPS growth (+11% YTD) that should be rewarded with a higher multiple, according to a post on StreetInsider.com.
  • 06/14: Cowen reiterated an Outperform rating on Microsoft after Kristin Chester, Sr. Finance Manager, offered insight into why Azure continues to grow much faster than the overall public cloud market, according to a post on StreetInsider.com.
  • 05/16: Credit Suisse believes ransomware could convince more institutions to accelerate their plans to upgrade to Windows 10 which would bring a large number of new Office 365 Commercial subscriptions, according to a post on Barron’s.com.

Technical Review

Microsoft is one of several large companies that moved higher in recent years after having been basically flat for a decade.  Microsoft’s move through $60 pushed above levels where the dot.com boom found resistance. The balance area around $70 followed $58. (Chart courtesy of StockCharts.com)

Summary

Microsoft is expected to lay off 3,000 people in connection with a sales reorganization in an effort to improve cloud software sales. Analyst bullishness remains and insider selling is normal for the company. Over the past year, Microsoft has beaten analyst consensus by an average of 6c the past four quarters. Estimize consensus for an EPS (or adjusted EPS) of $0.73 on revenue of $24.262 bln compares to analyst consensus of $0.71 on revenue of $24.26 bln.

 

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