Goldman Reviews Microsoft's Q4 Results

Goldman Sachs has raised its estimates and target price on Microsoft Corporation (NASDAQ: MSFT) after the Windows software maker's fourth-quarter results topped the Street's view.

Estimates And Justifications Post-Print

The brokerage raised its FY17 non-GAAP revenue forecast by $200 million to $94.2 billion, while hiking its non-GAAP EPS estimate by $0.10 to $2.84, with $0.07 of this increase due to lower tax rate assumptions. Consensus estimate prior to the print called for revenue of $95.2 billion.

"We note our EPS estimate remains below consensus of $2.88 entering the print, which we expect to come down slightly as it has following five of the past six prints dating back to F2Q15," analyst Heather Bellini wrote in a note.

Related Link: Microsoft Was Right To Lower Guidance For Next Quarter

Microsoft reported fourth-quarter non-GAAP revenue of $22.6 billion (+2 percent year-over-year, +5 percent year-over-year in constant currency), above consensus of $22.2 billion. This compared to guidance of $21.7 billion–$22.4 billion. Non-GAAP EPS was $0.69, ahead of consensus estimate of $0.58.

The company beat consensus revenue on each of its three segments, with the biggest outperformance in the productivity and business processes segment, which consists of Office, Office 365, Dynamics and Skype.

Despite the revenue upside, non-GAAP operating margins were 30bps below the Street at 27.5 percent due to opex, which was above the guidance range for just the second time in 11 quarters.

Guidance

Microsoft guided first-quarter revenue and non-GAAP EPS below the Street at the midpoint, at $21.2 billion–$21.9 billion and $0.64–$0.69 versus consensus of $22.2 billion and $0.69, respectively. Bellini noted that for the ninth time in the past 12 quarters, management has guided down out quarter revenue.

"Matching up the low and high ends of the company's revenue, COGS, and operating expense guidance, and taking the tax rate at the midpoint (20 percent) yields an EPS range for F1Q17 of $0.64–$0.69 versus the Street at $0.69 (GSe $0.67)," Bellini said.

Further, Microsoft guided to a total FX headwind of 200bps on a year-over-year basis (about $430 million), which is above Goldman's prior view of about 50bps headwind to first-quarter total revenue into the print on a year-over-year basis.

The company also provided FY17 opex guidance of $31.1 billion–$31.4 billion (roughly flat with last year) and noted gross margins are expected to decline 100bps year-over-year, although commercial cloud gross margins are expected to improve materially.

Bellini maintains her Neutral rating and increased her price target to $57 from $55.

Shares of Microsoft closed Tuesday's regular trading session at $53.09. In the pre-market hours, they gained 5.10 percent to $55.80. At $55, Microsoft trades at 20x and 18x Goldman's CY16 and CY17 non-GAAP EPS estimates of $2.72 and $3.00 (prior $2.60 and $2.88).

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