Microsoft Was Right To Lower Guidance For Next Quarter

Microsoft Corporation MSFT reported robust Q4 results, with the revenue and EPS beating the consensus expectations. Wunderlich’s Ryan MacDonald maintained a Hold rating on the company, while raising the price target from $55 to $60.

“Despite continued declines in the legacy software licenses business, MSFT appears to be executing well on transitioning to more cloud-based offerings as strength in Azure and Office 365 drove the top-line performance,” MacDonald mentioned.

Related Link: Microsoft Jumps After Q2 Earnings Beat

Microsoft reports its revenue at 22.6 billion with non-GAAP EPS of $0.69, ahead of the consensus forecasts. Top line strength was driven by a 102 percent increase in Azure revenue, as well as 54 percent growth in Office 365.

MacDonald stated that a favorable tax rate drove the EPS beat, while the annualized revenue run rate for commercial cloud exceeded $12.1 billion, up from $10 billion in 3Q16.

According to the Wunderlich report, “During 4Q, MSFT returned a total of $6.4B to shareholders through a combination of share repurchases and dividends, in line with last quarter.”

There is about $6.4 billion remaining on Microsoft’s existing share buyback program, which the company is committed to completing by December 2016.

1Q17 Guidance

However, Microsoft guided to 1Q17 below the consensus expectations. MacDonald believes the initial consensus forecasts were slightly high and need to come down.

The company guided to Q1 revenue of $21.2-$21.9 billion, below the consensus forecast of $22.08 billion, due to expectations of a 200 bps FX headwind. COGS was guided to $7.5-$7.6 billion, with opex of $7.35-$7.45 billion.

“While MSFT has not included any consideration for LinkedIn Corp LNKD in its FY17 outlook, the acquisition is still expected to close in 2Q,” MacDonald added.

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