Pieces To The Microsoft Puzzle Begin To Fall Into Place As Profitability Improves

Microsoft Corporation MSFT reported its Q2 2017 results and Q3 guidance ahead of expectations.

“The pieces are falling into place as we are starting to see an important shift in the model, with improving profitability in growth segments,” RBC Capital Markets’ Ross MacMillan said in a report.

MacMillan maintained an Outperform rating on the company, while raising the price target from $65 to $71.

Results And Guidance

Microsoft reported a clean beat, with revenue, non-GAAP EPS and free cash flows of $26.2 billion, $0.83 and $4.3 billion, ahead of Street expectations of $25.3 billion, $0.79 and $3.4 billion, respectively. All segments performed better than expected, MacMillan noted.

The mid-points of the company’s revenue and implied non-GAAP EPS guidance were at $23.5billion and $0.73, versus the Street’s $22.6 billion and $0.72, respectively.

Pieces Falling Into Place

While profitability at the More Personal Computing segment continues to be the key driver, “we see the start of a shift toward the growth segments becoming bigger contributors,” the analyst commented. Excluding currency impact, the Productivity and Business Processes segment was able to grow EBIT for the second consecutive quarter, while losses at the Intelligent Cloud segment are “diminishing fast.”

MacMillan expects Microsoft’s earnings drivers to become “more balanced” over the next year, which would increase confidence in the sustainability of earnings growth.