What To Expect Ahead Of Microsoft Corporation Q3 2016 Earnings

  • Microsoft is due to report Q3 FY16 earnings on Apr. 21, 2016.
  • Microsoft is expected to report another solid quarter.
  • Microsoft stock is likely to continue making good gains over the long-term.

Giant software company Microsoft Corporation (NASDAQ:MSFT) is slated to report Q3 FY16 (calendar first-quarter 2016) earnings on Apr. 21 2016, after market close. The consensus on Wall Street is for Microsoft to report revenue of $22.10B which will be good for 1.8% Y/Y growth and EPS of 0.63, up 3.3% Y/Y. Meanwhile there is a whisper that Microsoft might post EPS of $0.68.

Microsoft has managed to beat earnings estimates for the last four consecutive quarters. During the last quarter, Microsoft beat revenue estimates by $440M and non-GAAP EPS by $0.07.

Microsoft Quarterly Earnings Surprise History

Quarter End
Per Share
EPS* Forecast
Dec2015 01/28/2016 0.78 0.69 13.04
Sep2015 10/22/2015 0.67 0.58 15.52
Jun2015 07/21/2015 0.62 0.56 10.71
Mar2015 04/23/2015 0.62 0.51 21.57

Source: NASDAQ

Microsoft usually provides quite comprehensive quarterly guidance. The company issued the following guidance for Q3 FY 16:

  • Revised expected FX impact for the quarter to 4 points up from 3 points in anticipation of a stronger dollar. But the dollar has actually been weakening this year and is currently 4.3% down YTD while the Yuan, Yen and Euro have all gained. This points to less severe currency headwinds for Microsoft.
  • Commercial unearned revenue to hit $18.8B-$19B with commercial cloud run rate remaining on track. During the last quarter, Commercial Cloud revenue run rate reached $9.4B from $8.2B. This is a closely-watched number by investors and the upcoming earnings call will be no different as shareholders check to see whether Microsoft will remain on track to achieve its goal of $20B in Commercial Cloud revenue by 2018. Microsoft said that it expects Office 365 and Azure to post margin improvements.
  • Microsoft’s Intelligent Cloud (Azure, Server Products, and Enterprise Mobility Solutions) revenue of $6.1B-$6.3B.
  • Personal Computing (Windows devices including Surface, Xbox and Bing) revenue of $9.1B to $9.4B.

Microsoft gave overall revenue guidance of $21.6B-$22.3B which at the time was below the Wall Street consensus of $22.33B. Microsoft does not provide EPS guidance but provides full-year expense guidance. The company cut its expense guidance from an earlier range of $31.9B-$32.1B to a slightly lower range of $31.4B-$31.6B. Meanwhile, the company said that it expects FY16 tax rate to remain unchanged at 19%-21%. This is obviously good for the company's bottom line.

The upcoming report is likely to be another solid quarter by Microsoft. Microsoft is in the throes of a business model transition from a company that sells software licenses to a cloud subscription company. So far the company has been making good progress in this regard, and the current quarter might be the inflection point where the company's revenue and earnings start recording positive growth, after falling for several quarters. During the last quarter, investors will note that Microsoft posted revenue decline of 2.9%. The company's guidance for the current quarter points to 1% Y/Y growth.

This is essentially what happens when a traditional software company transitions to a cloud company. Perhaps the best case study that investors can use for reference is Adobe Systems (NASDAQ:ADBE). Revenue from one-time perpetual software licenses is recognized as one upfront payment. In contrast, subscription cloud revenue is billed on a monthly basis over a longer period of time. This inevitably leads to a company recognizing lower revenue and earnings during the first phase of the transition. But once a company builds a large enough subscription customer base, revenue and earnings start growing again. Microsoft could be close to reaching this turning point.

Microsoft has been making good progress on businesses such as Surface tablets and Bing Search which have in the past been a drag on profitability. Surface revenue clocked in a record $1.3B during the last quarter after Microsoft launched Surface Pro 4 and the Surface Book. Microsoft said that it expects the laptop to gain momentum as it enters new markets in China, Europe, Asia, and Japan. Meanwhile, Bing Search recently turned a profit after years of mounting losses.

Investor Takeaway

Microsoft stock has climbed post earnings in 14 out the last 24 quarters. Barring any major surprises, the upcoming earnings call by Microsoft is likely to be pretty solid. This should help the stock continue making good gains after climbing 33% over the last 12 months.

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