The News: Microsoft shares surged 6% in extended trading on Tuesday after the software maker issued fiscal third-quarter earnings that exceeded analysts’ expectations and an optimistic outlook for the current quarter.
Here’s how the company did:
- Earnings: $2.22 per share, adjusted, vs. $2.19 as expected by analysts, according to Refinitiv.
- Revenue: $49.36 billion, vs. $49.05 billion as expected by analysts, according to Refinitiv.
Microsoft’s revenue increased by 18% year over year in the quarter, which ended on March 31, compared with 20% in the previous quarter, according to a statement. Microsoft turned in the smallest revenue beat since 2018, exceeding consensus by less than 1%. Sales and marketing expenditures totaled $5.6 billion, 10% higher than the year-ago quarter and the fastest growth in more than three years. Read the full news item on CNBC.
Analyst Take: Microsoft delivered a solid result in its fiscal Q3, just above expectations on top and bottom line, reporting revenue of $49.36B and EPS of $2.22, topping consensus estimates of $49.05B and $2.19B EPS respectively.
The company realized double-digit growth in Revenue, Operating Income, Net Income, and EPS across the board (non-GAAP), which should give investors confidence despite the recent pull back in tech that has hit most growth names including Microsoft putting it off its highs by more than 20%, albeit much less than some growth names like NVIDIA, AMD, and Meta that have seen significantly steeper declines. However, after tough misses from Alphabet and overall poor performances from Netflix, the market is souring on even the best performing tech companies. To be clear, it is more than just earnings shaping the market with major macro headwinds impacting markets at large.
- Revenue was $49.4 billion and increased 18%
- Operating income was $20.4 billion and increased 19%
- Net income was $16.7 billion and increased 8% GAAP (up 13% non-GAAP)
- Diluted earnings per share was $2.22 and increased 9% GAAP (up 14% non-GAAP)
In this earnings period, I was closely watching the company’s performance in its three major segments. Productivity, Intelligent Cloud, and Personal Devices/Computing. This encompasses the vast majority of the company’s revenue and it had robust results in all three, with LinkedIn, Dynamics 365, and Azure (46%) leading the way. The company saw no declines in any of its revenue categories. Surface also grew by double digits, delivering a 13% YoY improvement.
Intelligent cloud and Azure saw strong growth at 29% and 46%, respectively, showing continued strong cloud demand and a solid sustained result, representing almost identical results to last quarter.
We have continued to watch the cloud business and its growth over the past several quarters to see if Microsoft could maintain a strong level of cloud demand as we exit the pandemic. However, the pandemic as an accelerator is now being met by new headwinds tied to macroeconomic forces including interest rates, inflation, and global conflicts. As I see it, there is little to indicate any macroeconomic headwinds will be slowing Microsoft’s growth in cloud, and moreover across many facets of its business. My thesis that technology is deflationary remains intact–this is particularly true for enterprise.
With all of this in mind, 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 said five quarters ago that I wouldn’t be surprised to see this 45-50% growth for Azure sustain for another 3-4 quarters based upon current momentum. We have now seen 5 consecutive at this rate of growth with this quarter coming in range. There are certainly market concerns but it is hard to not see Microsoft continuing to outperform expectations as companies look for measures to be more efficient and deliver better customer experiences powered by software, cloud, and data.
Productivity and Business Growth Fueled by D365 and LinkedIn
Microsoft’s Productivity segment delivered another robust performance which continued a string of double-digit growth (17%), coming in below last quarter’s 19% growth, but still solid as demand in the market for Office 365 continues to rise. This could be partially based upon a price increase that is coming for Office 365, but the trend has been continuous so I don’t believe that is a major factor, but rather a potential pull forward.
The area that has continued to capture my attention has been the growth of Microsoft’s own play in CRM/ERP — 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 35% growth this quarter. I’ve been speculating for some time about a tighter race in business productivity and this thesis seems to be gaining momentum–especially with Salesforce and Microsoft continuing to look like the fiercest of competitors. I also continue to be impressed by the company’s CDP platform, Customer Insights, as an extension of its business applications or as a net new business winner against other business software providers.
LinkedIn continues to look like a great portfolio addition and source of high value application data with revenue up another 34% after delivering 37% YoY in the last quarter. The LinkedIn acquisition continues to provide robust top and bottom line numbers to the productivity and business processes category. I see the long-term role that LinkedIn has to play as a critical differentiator and important for the company’s desire to play and expand in hot social communities, much like it has with GitHub for developers, and pending regulatory approval will have with the 400 million monthly Activision gamers . The LinkedIn audience provides such valuable data and Microsoft has many ways to continue to unlock it. Yet, the company has continued to give the platform autonomy, which I also believe is important.
More Personal: Surface Growth Speeds Up (13%)
The last category I tracked closely for this quarter was the “More personal” segment, which saw a slightly lower 11% YoY versus 15% YoY growth last quarter.
Gaming had a decent quarter rising 6% with Xbox content and services up 4%. The real move here came with hardware which had double digit growth and another quarter of market share gains based upon sustained demand for the company’s newest gaming consoles. This will be an interesting segment to watch as consumer sentiment has ticked up but liquidity is dropping making longer term spend on gaming a possible risk factor.
Surface growth accelerated this quarter after a bounce back Q2 that had come on a series of small declines that had some as somewhat of a surprise as PCs largely booned during the pandemic. This quarter, Surface revenue saw 13% growth, which I was pleased with given the slowing expectations for PC demand. I stand by my assessment that Surface is the best positioned to provide a competitive option to Apple for the high-end target audience. Given the volume of PC sales that were in the lower end of the market, it isn’t entirely surprising that Microsoft hasn’t seen bigger Surface numbers, but I’m interested in seeing the company apply more weight in this category. This week’s Apple results will be telling if M1 sales outsize market expectations.
A Blizzard of Activity
While it isn’t yet material to the earnings results, it is important to note that Microsoft did announce a massive deal to acquire Activision Blizzard for more than $68 billion in an all cash deal.
Read our coverage on this deal on MarketWatch.
Heading into Q4, the company is expecting $52.4 billion to 53.2 billion in revenue in the fiscal fourth quarter, in the middle of the $52.9 billion Refinitiv consensus. The company also shared that it expects full-year operating margins to widen slightly.
Overall, the guidance was extremely positive given the markets general increasingly negative market sentiment toward tech. As I’ve continued to reiterate that tech is stronger than much of the media narrative and Microsoft is in extremely good shape to weather any macroeconomic shifts that it may encounter.
Overall, FY ‘22 Q3 delivered a very positive trendline for Microsoft. The growth remained on pace with the past several quarters, which have been some of Microsoft’s best historic results. The key going forward will be sustaining this strong momentum even with more difficult macroeconomic headwinds. Guidance indicates this should remain at least through the next quarter.
Continuing to watch its diverse growth along with the companies broad product mix will provide an intriguing path forward as the company seems to have a better handle than most on its longer term trajectory.
Disclosure: Futurum Research is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of Futurum Research as a whole.
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Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio