Microsoft: Color on Quarter
- MSFT -5% premarket.
- RBC lowers tgt to $61 from 63. Weaker transactional rev and shift to annuity in Server Products/ Office drives a bigger than expected revision to our ests (already below Street). Growth in key assets of O365 and Azure remain strong, but cloud GM improvement took a pause due to mix. All up, they lower their EPS ests 3% and raise their capex assumptions, but still expect teens EPS growth in F2H17.
- Wunderlich, quoting the musical genius Prince, "I never meant to cause you any sorrow." Investors are likely to be disappointed in the outlook as MSFT heads into its seasonally strongest quarter. The 3Q EPS miss was due to taxes and non operational, however, the co guided Q4 revenue and EPS below consensus and more importantly FY2017 consensus estimates are to aggressive and need to be reduced. They are reiterating their Hold rating and $55 price target on Microsoft (MSFT) following the co's 3Q results. They would look to get more constructive as fundamentals improve during the company's cloud transition from a perpetual/transactional business to a subscription business.
- Stifel believes Microsoft continues to make steady progress with its cloud transition and they expect Office 365 and Azure to be solid top-line and bottom-line contributors for years to come. Accelerating Office 365/Azure growth will pressure gross margin expansion given the quickening mix shift, but they expect headwinds to dissipate over time as these businesses scale. Further, they expect continued op-ex discipline (management expects FY17 op-ex of flat-to-modestly higher, a positive remark in their view) and look for gross profit, operating profit, and FCF growth in coming quarters. Given this backdrop, along with shareholder-friendly activities (>$14B in annual dividends/buybacks; ~2.6% dividend yield), they remain buyers.
- BMO lowers tgt to $57 from $58. MSFT has become a harder stock to like as margin impact from mix overwhelms revenue and operating cash flow growth. They are lowering FY2017 EPS estimate from $2.98 to $2.65, driven by both lower assumed revenues and margins. They think MSFT is inexpensive based on FCF but less so based on P/E. Given that we now project operating income to decline in FY2017, they believe that MSFT has moved into a patient long story. The growth in deferred revenue (28% y/y in the March quarter) and operating cash flow will help support the stock.