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Microsoft Q2 Delivers on Strength Across its Portfolio
by Daniel Newman | January 26, 2021

The News: Microsoft stock rose as much as 6% in extended trading on Tuesday after the company reported fiscal second-quarter earnings and Azure cloud revenue growth that exceeded analysts’ expectations.

Here’s how the company did:

  • Earnings: $2.03 per share, adjusted, vs. $1.64 per share as expected by analysts, according to Refinitiv.
  • Revenue: $43.08 billion, vs. $40.18 billion as expected by analysts, according to Refinitiv.

Microsoft revenue grew 17% on an annualized basis, up from 12% growth in the prior quarter, according to a statement. Read the full news piece on CNBC.

Analyst Take: Microsoft delivered a robust result in its fiscal Q1, reporting revenue of $43.08B and EPS of $2.03, topping consensus estimates of $40.18B and $1.64 EPS respectively.

The company realized impressive double-digit growth in Revenue, Operating Income, Net Income, and EPS across the board, which should add to investors’ confidence despite recent market turbulence and the ongoing impacts of the pandemic and election. Microsoft confirmed that it is clearly a 

  • Revenue was $37.2 billion and increased 12%
  • Operating income was $17.9 billion and increased 29%
  • Net income was $15.5 billion and increased 33%
  • Diluted earnings per share was $2.03 and increased 34%

For this earnings period, I was closely watching the company’s performance in three major areas. Productivity, Intelligent Cloud, and Personal Devices/Computing. This encompasses the vast majority of the company’s revenue and it had strong results in all three, with Intelligent Cloud, Dynamics 365, and Azure leading the way:

Intelligent cloud and Azure saw strong growth at 26% and 50%, respectively, showing continued strong cloud demand and an increase versus last quarter where its growth came in at 20% and 46%. There seemed to be some question marks around whether Microsoft could maintain this level of cloud demand as the pandemic continues, but there is a strong correlation between the economic rebound numbers and investments in cloud technology. This worked out well for Microsoft in the most recent quarter.  It’s hard not to be bullish about the Azure offerings. Microsoft and AWS continue to expand their offerings and this expansion is leading to greater revenue and stickiness among its customers. I wouldn’t be surprised to see this 45-50% growth for Azure sustain for another 3-4 quarters based upon current momentum. 

Microsoft’s Productivity segment continued its strong performance which  continued a string of double-digit growth (13%), beating last quarter’s 11% growth as demand in the market for Office 365 continues to rise. The area that caught my attention the most though was the growth of Microsoft’s own play in CRM/ERP, its Dynamics, and Dynamics 365 business. I feel this area of growth is benefitting materially from the continued strength in the company’s Azure business as well as its Power Platform gaining momentum. This bodes well for the Dynamics and Cloud ERP (Dynamics 365) category, which the latter continues to be big for this category delivering 39% growth this quarter.  I’ve been speculating for some time about a tighter race in business productivity and this thesis seem to be gaining momentum–especially with Salesforce and Microsoft continuing to look like the fiercest of competitors.

LinkedIn continues to look like a solid diversification play with revenue up 23% and session growth up 30%. This has been a bit of an unsung hero in the productivity and business processes category, but is certain to be a stalwart as the professional network continues to gain popularity and realize revenue growth.

The last category I tracked closely for this quarter was the “More personal” segment, which saw 14% category growth led by big growth in Xbox content and services at 40%. Gaming had an explosive result based upon the new Xbox Series X|S, which saw hardware Revenue spike by 86%. Surface revenue grew more slowly this quarter after a huge Q1 coming in at 37%. This will be interesting to hear more about in the earnings call and follow up analysis. Microsoft had been showing signs of competing in Apple’s ultra high-end laptop space, but the brief stall in growth will warrant more attention and analysis.

A note of interest for me is the announcement of Microsoft Cloud for Healthcare. I’ve been closely monitoring vertical cloud development and implementation and I’m eager to see how Microsoft scales this particular offering both within healthcare and then cross-industry. I expect banking, retail, manufacturing clouds to be key interest areas moving forward.

Overall Impressions of Microsoft FY 21 Q1 Earnings 

Overall, FY ’21 Q2 was an excellent quarter for Microsoft. The key is going to be sustaining this strong momentum. As its cloud continues to grow, large numbers can challenge big growth percentages, but the uptick this quarter shows that there is still growth to be had. It also remains clear that even the pandemic and its lingering effects have attached to digital investment rather than negatively impacting spending. This makes for a strong bull case for Microsoft and its ability to weather any impending setbacks–although it would seem that by the second half of the year there should be signs of more normal mobility and economic activity. 

Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.

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Image: Microsoft
Daniel Newman