Microsoft Posts Big Earnings Beat and Gives Optimistic Revenue Forecast

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  • Microsoft surpassed expectations on the top and bottom lines with stronger-than-expected Azure revenue growth, but supply constraints cut into Windows revenue from device makers.
  • The company's revenue guidance beat expectations as well.

Microsoft shares initially fell before rebounding and rose as much as 1% in extended trading on Tuesday after the software and hardware company issued fiscal fourth-quarter earnings and quarterly revenue guidance that exceeded expectations.

Here's how the company did:

  • Earnings: $2.17 per share, adjusted, vs. $1.92 per share as expected by analysts, according to Refinitiv.
  • Revenue: $46.15 billion, vs. $44.24 billion as expected by analysts, according to Refinitiv.

Revenue rose 21% year over year in the quarter, which ended June 30, according to a statement. Revenue had increased by 19% in the previous quarter. Net income increased by 47%.

With respect to guidance, Microsoft called for $14.5 billion to 14.75 billion in fiscal first-quarter revenue from its Productivity and Business Processes segment, higher than the $14.07 billion StreetAccount Estimate. For the Intelligent Cloud segment, the company sees $16.4 billion to $16.65 billion in revenue, higher than the $15.71 billion consensus. And the More Personal Computing segment guidance was $12.4 billion to $12.8 billion in revenue, with the middle of the range coming in just short of the StreetAccount consensus of $12.67 billion.

In the fiscal fourth quarter, Microsoft's Intelligent Cloud segment, which includes the Azure public cloud, Windows Server, SQL Server and GitHub, produced $17.38 billion in revenue, up 30% year over year. Analysts polled by StreetAccount had expected $16.33 billion in revenue.

Revenue from Azure, which competes with Amazon Web Services, grew 51% in the quarter, or 45% in constant currency. Analysts had been expecting 45.3% revenue growth from Azure, according to a CNBC consensus, while the StreetAccount consensus was 42%. In the prior quarter, Azure revenue grew 50%. Microsoft does not disclose Azure revenue in dollars.

In the fiscal first quarter, Azure revenue growth in constant currency should remain relatively stable on a sequential basis, Microsoft's finance chief Amy Hood said on the company's earnings call.

The Productivity and Business Processes unit, which contains Office productivity software along with LinkedIn and Dynamics, contributed $14.69 billion in revenue, up 25% and above the StreetAccount consensus of $13.93 billion.

Microsoft's seat growth for commercial Office 365 subscriptions accelerated to 17% from 15%, with the company citing higher revenue per user and better results from products designed for small businesses and front-line workers. The Teams chat and calling app in Office 365 now has 250 million monthly active users, Microsoft said. The premium E5 tier now accounts for 8% of all commercial Office 365 subscriptions, Hood said.

Microsoft's More Personal Computing segment, which features Windows, as well as devices, gaming and search advertising, generated $14.09 billion in revenue. That's up 9% and more than the $13.74 billion StreetAccount consensus.

Technology industry research company Gartner estimated that PC shipments grew 4.6% in the quarter. Microsoft's revenue from device makers for Windows licenses in the quarter fell 3%, with license revenue associated with consumer PCs decelerating to a decline of 4% from 44% growth in the prior quarter. The company pointed to supply constraints, which PC makers Dell and HP have flagged in recent months.

Sales of Microsoft-branded Surface PCs dropped 20%, worse than the decline in the mid-teens range that Microsoft had called for in April, because of supply challenges.

The coronavirus pandemic benefited Microsoft results in some ways and hurt in others. The company's revenue from Xbox content and services, including sales of video games, declined 4%, with the metric comparing unfavorably against 65% growth in the year-ago quarter.

Microsoft's server products category, which features the Windows Server operating system and SQL Server database software, delivered 16% revenue growth, up from 3% in the prior quarter thanks to an easy comparison against the year-ago quarter because of transactional weakness at the time. Those conditions also arose because of Covid.

Search advertising revenue grew 53% as the advertising market rebounded. That also benefited the LinkedIn business, which showed 46% growth. The Marketing Solutions business tied to advertising grew 97%, with more than $1 billion in quarterly revenue, Microsoft CEO Satya Nadella said on the call. LinkedIn overall now generates $10 billion in annual revenue, he said.

During the fiscal fourth quarter, Microsoft announced its intent to acquire speech-recognition company Nuance Communications for $19 billion, including debt. It also introduced Windows 11, a new version of its desktop operating system, although sales of licenses to device makers will be deferred.

The company's board voted to make Nadella its chair, and Microsoft's top individual shareholder, co-founder Bill Gates, announced that he's splitting up with his wife, Melinda French, who also once worked at Microsoft.

Notwithstanding the after-hours move, Microsoft shares are up about 29% since the start of 2021, while the S&P 500 index has risen almost 17% over the same period.

WATCH: Here's Microsoft's latest earnings report

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