Azure Continues To Drive Microsoft Corporation; Goldman Expects Above Consensus EPS

Goldman Sachs expects Microsoft Corporation MSFT to report its first-quarter earnings above consensus, driven by strength in Azure.

Microsoft is set to report its first-quarter earnings on October 20. Goldman sees non-GAAP EPS of $0.69, versus consensus of $0.68 and compares to “our calculated guidance range of $0.64–$0.69.”

The brokerage projects revenue of $21.7 billion (flat year-over-year, +2 percent year-over-year cc), in line with consensus and compared to guidance of $21.2 billion–$21.9 billion (-2 percent to +1 percent year-over-year, flat to +3 percent year-over-year cc).

“Overall our field checks were positive, driven by strength in Azure. Office 365 also saw strength but not nearly as high as last year or compared to Azure. This was offset in part by less demand for servers in the quarter, as enterprises continue to move more workloads to the cloud,” analyst Heather Bellini wrote in a note.

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However, Bellini has a Neutral rating and $57 target on the stock as he still views downside risk to FY17 and FY18 non-GAAP EPS estimates, despite consensus estimates have compressed and are now within $0.08 and $0.05 of his estimates.

“While we believe MSFT will continue its trend of beating current quarter consensus and guiding down out quarter estimates in F1Q17, we note that the pending acquisition of LinkedIn (expected to close within CY16) may impact this trend later in the year as current guidance does not include the impact of the proposed acquisition,” Bellini continued.

Analyst's Take

For the first quarter, the analyst estimates a total FX headwind of about 200bps to revenue, in line with guidance.

Meanwhile, preliminary September quarter PC data was better than expected again this quarter (IDC -3.9 percent year-over-year and Gartner -5.7 percent versus GS -6.1 percent), in line with the brokerage’s field checks.

Excluding the Win10 deferral, Bellini sees deferreds growing 7 percent year-over-year and -9 percent quarter-over-quarter, which compares to -9 percent quarter-over-quarter in the same quarter last year.

Looking ahead, the analyst forecast second quarter deferred revenue of $33.3 billion, versus consensus of $32.8 billion, which excludes a significant outlier.

Microsoft is trading at 21x and 19x GS’ CY16 and CY17 estimated EPS of $2.72 and $2.97 (prior $2.72 and $3.00) versus consensus of $2.79 and $3.05, respectively.

Shares of Microsoft closed Friday’s trading at $57.42 and were relatively flat in Monday's pre-market at $57.38.

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