The News: Microsoft shares edged 2% higher in extended trading Tuesday after the software and hardware maker reported fiscal first-quarter earnings that exceeded analysts’ estimates.
Here’s how the company did:
- Earnings: $2.27 per share, adjusted, vs. $2.07 as expected by analysts, according to Refinitiv.
- Revenue: $45.32 billion, vs. $43.97 billion as expected by analysts, according to Refinitiv.
Total company revenue climbed almost 22% year over year, according to a statement. That’s the fastest growth since 2018. Revenue grew 21% in the previous quarter. Read the full news item on CNBC.
Analyst Take: Microsoft delivered a robust result in its fiscal Q1, reporting revenue of $45.32B and EPS of $2.27, topping consensus estimates of $43.97B and $2.07B 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 as we move into the later phases of the pandemic and begin to see a return to more normal business activity and behavior in the 2nd half of the calendar year.
- Revenue was $45.3 billion and increased 22%
- Operating income was $20.2 billion and increased 27%
- Net income was $20.5 billion GAAP and $17.2 billion non-GAAP, and increased 48% and 24%, respectively
- Diluted earnings per share was $2.71 GAAP and $2.27 non-GAAP, and increased 49% and 25%, respectively
- GAAP results include a $3.3 billion net income tax benefit explained in the Non-GAAP Definition section below
For this earnings period, I was once again 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 strong results in all three, with Intelligent Cloud, Dynamics 365, and Azure leading the way. Personal Devices (More Personal) has a few caveats that I will point out later in this piece :
Intelligent cloud and Azure saw strong growth at 31% and 50%, respectively, showing continued strong cloud demand and a solid sustained result versus last quarter where growth came in at 33% and 51% respectively. There have been some question marks over the past several quarters as to whether Microsoft could maintain this level of cloud demand as the pandemic continues, and now moreover as we exit the pandemic, but as I see it, there continues to be a strong correlation between the economic rebound numbers and investments in cloud technology. Furthermore, there are industries that have been in contraction that are starting to bounce back that will be turning to tech investment to future proof their business–Microsoft stands to benefit from these rebounding industries.
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 last quarter that I wouldn’t be surprised to see this 45-50% growth for Azure sustain for another 3-4 quarters based upon current momentum. 3/3 so far, with this quarter coming in at the top of the range.
Productivity and Business Applications Grow
Microsoft’s Productivity segment delivered another robust performance which continued a string of double-digit growth (22%), coming in slightly below last quarter’s 25% growth as demand in the market for Office 365 continues to rise. 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 48% 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 42%, powered by its marketing solutions seeing a 61% jump for the quarter. This 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. The LinkedIn audience is such a valuable data mine 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: On the Surface
The last category I tracked closely for this quarter was the “More personal” segment, which saw 12% category growth led by growth in Windows Commercial and OEM at 10 and 12% growth respectively along with advertising, which was up over 40%.
As I mentioned above about the caveats in More Personal. Let’s unpack those a bit further:
Gaming had a nice quarter rising 16% with Xbox content and services up 2%, following what was a weak quarter for the segment. The real move here came with hardware which had triple digit growth based upon sustained demand for the company’s newest gaming consoles. I expect this will pick up even more as chip availability grows and with holiday seasons falling in the first half of the new fiscal. However, the supply constraints heading into the holiday could lead to lower revenues than what would be possible for this category.
Surface revenue saw another decline this quarter after a 20% decline to finish out the previous fiscal year, coming in at 17% decline. 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 growth has been slower than overall PC growth, which is starting to slow a bit after the initial COVID boom. Like the Xbox, I tend to believe that a significant portion of the slowed sales has to do with the chip shortages, and also like gaming the holiday season should be a good time for the company, but supply will be the great unknown as lead times for chips are still much longer than pre-pandemic..
It’s also worth reiterating that a lot of the growth in PC and Notebook has been down market, which isn’t an area where Surface is trying to be present. However, the decline hits Microsoft in a few ways given the material decline in Windows licenses, which were down 3% this quarter along with revenue from consumer PC licensing also being down 4% versus a jump of 44% last quarter.
Overall Impressions of Microsoft FY 21 Q4 Earnings
Overall, FY ‘22 Q1 was a very strong quarter for Microsoft. The growth outpaced last quarter, which had equaled its best since 2018. The key going forward will be sustaining this strong momentum. As its cloud business continues to grow, large numbers can challenge big growth percentages, but the uptick this quarter shows that there is still growth to be had. Satya Nadella has indicated in many ways that he sees a clear growth opportunity, and that the large quarterly results are clearly not a prohibitor of future growth.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice. Neither the Author or Futurum Research holds any positions in any companies mentioned in this article.