Microsoft shares surge on strong results and an upbeat forecast

Microsoft shares surge on strong results and an upbeat forecast

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Microsoft Corp. beat earnings estimates today with better-than-expected revenue across nearly all its product lines in the fiscal third quarter.

The company also issued a bullish forecast, helping send the stock up about 5% in after-hours trading.

Revenue rose 18% over the year-ago quarter, to $49.36 billion, beating analysts’ estimates of $49 billion. Earnings of $16.73 billion, or $2.22 a share, beat estimates of $2.19, rising 9% from a year ago. The first price increase in the Office 365 product suite in nearly a decade provided a boost to sales.

Particularly notable was growth in the cloud business, with commercial bookings growth of 28% and Microsoft Cloud revenue of $23.4 billion, up 32% year over year. Intelligent Cloud revenue grew 26%, to $19.1 billion, beating Wall Street estimates of $18.9 billion, with server products and cloud services revenue up 32% driven by Azure, along with other cloud services revenue growth of 49%.

“The last two years have proven that every organization needs a digital fabric that connects the entire organization from the board room for the front lines to customers and partners,” said Chief Executive Satya Nadella (pictured). “No company is better positioned to meet this need than Microsoft.”

Nadella said he has seen no indication that customers are cutting their information technology budgets and predicted that technology spending is going to double as a percentage of gross domestic product by the end of the decade.

Cloud spending slows slightly

Microsoft cautioned that cloud revenue growth is likely to slow sequentially from its recent torrid rate but that the Intelligent Cloud division should still turn in revenue of between $21.1 billion and $21.35 billion in the fiscal fourth quarter, driven by Azure.

“The cloud business continues to grow like a weed,” said Glenn O’Donnell, vice president and research director at Forrester Research Inc. “It’s hard to understand how a $2 trillion company can keep up such a pace of growth, but Microsoft is doing it.”

Microsoft is widely perceived as No. 2 in the cloud but its total business is much larger than any competitor’s, noted Charles King, chief analyst at Pund-IT Inc. Commercial cloud revenues of $23.6 billion are “significantly more than the $17.7 billion that [Amazon Web Services Inc.] generated last quarter, though [AWS’s] 40% growth rate was higher than Microsoft’s,” he said.

That’s because AWS is primarily an infrastructure company while Microsoft folds its cloud applications business into its total cloud revenue picture. “Microsoft also counts Office 365 Commercial, LinkedIn commercial and Dynamics 365 as part of its Commercial Cloud business,” King said. “The wide variance between Microsoft’s and Amazon’s service offerings suggests that conventional definitions of ‘cloud computing’ are becoming increasingly strained.”

Office sales strong

Revenue in the Productivity and Business Processes line of business grew 17% from a year ago, to $15.8 billion. Growth was led by Office 365 Commercial revenue growth of 20% in constant currency. Although Office is considered a mature product, Nadella said “the intensity of usage has gone up” amid the pandemic.

LinkedIn revenue increased 35% amid strong hiring demand. Dynamics products and cloud services revenue increased 25%, driven by Dynamics 365 growth of 38%.

Revenue in the More Personal Computing rose 11%, to $14.5 billion, with Windows OEM revenue up 11%, aided by continuing strength in the PC market despite forecasts that pandemic-related sales spikes would have run their course by now.

Microsoft stock jumped on an upbeat forecast for the fourth quarter and full year. It said it expects the Productivity and Business Processes segment to come in at between $16.65 billion and $16.9 billion despite a slight slowdown in Office 365 revenue. The More Personal Computing segment is forecast to have revenues of between $14.65 billion and $14.95 billion.

“We expect to close FY 22 with the same consistency we have delivered throughout the year with strong growth, revenue share gains and improving operating margins,” said Chief Financial Officer Amy Hood. She added that Microsoft management is confident that “we will continue to drive healthy double-digit operating and income growth.”

Image: “Flickr CC

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