A month has gone by since the last earnings report for Microsoft (MSFT). Shares have lost about 5.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Microsoft due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Microsoft’s Q2 Earnings & Revenues Surpass Estimates
Microsoft reported second-quarter fiscal 2022 earnings of $2.48 per share, which beat the Zacks Consensus Estimate by 8.3%. The bottom line surged 22% on a year-over-year basis.
Revenues of $45.3 billion increased 20.1% year over year and surpassed the Zacks Consensus Estimate by 2.79%.
Robust adoption of Azure cloud offerings drove the top line. Continued momentum in usage of the Teams app, advanced security and identity offerings were other tailwinds.
Commercial bookings climbed 32% year over year (up 37% at cc), courtesy of consistent execution across new, add-on and renewal sales motions, as well as the large, long-term Azure contracts Microsoft inked in the reported quarter.
Commercial remaining performance obligation amounted to $147 billion, up 31% year over year (up 32% at cc). Commercial revenue annuity mix was 94%, up 1% year over year owing to the ongoing shift to cloud infrastructure.
Microsoft cloud revenues were $22 billion, up 32% year over year.
Segmental Details
The Productivity & Business Processes segment, which includes the Office and Dynamics CRM businesses, contributed 30.8% to total revenues. Revenues increased 19.3% (up 19% at cc) on a year-over-year basis to $15.94 billion.
Office Commercial products and cloud services revenues rose 14% (same percentage at cc) on a year-over-year basis. Office 365 commercial revenues rallied 19% (same rate at cc). The upside can be attributed to strong installed base growth and average revenue per user expansion.
E5 revenue growth was driven by strength in the advanced security, compliance and voice components.
Paid Office 365 Commercial seats increased 16% year over year, driven by growth across small- and medium-sized businesses as well as front-line worker offerings.
Office Consumer products and cloud services revenues rose 15% (same percentage at cc), driven by growth in Microsoft 365 subscription revenues. Microsoft 365 Consumer subscribers totaled 56.4 million at the end of the fiscal second quarter.
Dynamics products and cloud services business increased 29% (same percentage at cc) year on year. Dynamics 365 revenues surged 45% (44% at cc) and the same from Power Apps was up 202% (up 197% at cc), noted Microsoft.
LinkedIn revenues advanced 37% from the year-ago quarter’s levels (up 36% at cc), driven by continued strength in Marketing Solutions, which grew 43% year over year, and better-than-expected performance by Talent Solutions.
Teams surpassed 270 million monthly active users in the reported quarter.
The Intelligent Cloud segment, including server and enterprise products and services, contributed 35.4% to total revenues. The segment reported revenues of $18.327 billion, up 25.5% (same percentage at cc) year over year.
Server product and cloud services revenues rallied 29% year over year (same percentage at cc). The high point was Azure and other cloud services’ revenues, which surged 46% year over year (same rate at cc). The upside was driven by robust growth in consumption-based business.
On-premises server products revenues increased 6% year over year on strong demand for hybrid offerings.
Enterprise mobility and security installed base revenues rallied 28% to more than 209 million seats.
Enterprise service revenues increased 8% (up 7% at cc) in the reported quarter, owing to growth in Microsoft Consulting Services and Enterprise Support Services.
More Personal Computing segment, which primarily comprises Windows, Gaming, Devices and Search businesses, contributed 33.8% to total revenues. Revenues were up 15.5% (same percentage at cc) year over year to $17.465 billion, driven by strength in gaming and Windows OEM.
Windows commercial products and cloud services revenues increased 13% year over year (up 14% at cc), on the back of higher customer adoption of Microsoft 365 offerings.
Windows OEM revenues were up 25% on a year-over-year basis owing to strength in the PC market.
Search advertising revenues, excluding traffic acquisition costs (“TAC”), increased 32% (same percentage at cc) on recovering advertising market.
Surface revenues were up 8% (same percentage at cc) year over year.
Gaming revenues increased 8%. Revenues from Xbox hardware grew 4% (up 3% at cc), driven by the new consoles.
Xbox content and services revenues were up 10% year over year.
Operating Results
Gross profit increased 20.4% year over year to $34.77 billion, driven by strong growth in cloud services.
Gross margin of 67% was unchanged on a year-over-year basis. Microsoft cloud gross margin was 71%, also slightly down year over year.
Operating margin expanded 150 bps on a year-over-year basis to 43%.
Productivity & Business Process operating income rose 24.4% to $7.69 billion. Intelligent Cloud operating income surged 26.3% to $8.20 billion. More Personal Computing operating income rallied 21.8% to $6.36 billion.
Balance Sheet & Cash Flow
As of Dec 31, 2021, Microsoft had total cash, cash equivalents and short-term investments balance of $125.4 billion compared with $130.6 billion as of Sep 30, 2021.
As of Dec 31, 2021, long-term debt (including current portion) was $48.26 billion compared with $53.29 billion as of Sep 30, 2021.
Operating cash flow during the reported quarter was $14.5 billion compared with $24.5 billion in the previous quarter. Free cash flow during the quarter was $8.6 billion compared with $18.7 billion in the prior quarter.
In the reported quarter, the company returned $10.9 billion to shareholders in the form of share repurchases ($6.2 billion) and dividends payouts ($4.7 billion).
Guidance
For third-quarter fiscal 2022, unfavorable forex is expected to hurt revenue growth by 2%.
Productivity and Business Processes revenues are anticipated between $15.6 billion and $15.85 billion. Strong upsell opportunity for Microsoft E5 and momentum in Office 365 are expected to drive growth in Office commercial.
On-premises business is anticipated to decline in high teens due to customers’ shift to cloud.
Office consumer revenues are expected to witness growth in high single-digits range, driven by increases in Microsoft 365 subscription revenues.
LinkedIn revenue growth is anticipated to be in the low-30% range. Revenue growth for Dynamics is expected to be in the mid-20% range, driven by strength in Dynamics 365, including continued momentum in PowerApps.
Intelligent Cloud revenues are anticipated between $18.75 billion and $19 billion. Azure’s revenue growth is likely to reflect continued strength in consumption-based services.
Gains from Microsoft 365 suite adoption are expected to boost growth in per-user business. However, the company noted that it was expecting some moderation in growth, given the large size of the installed base.
For Enterprise Services business, Microsoft expects revenue growth to be in the low to mid-single digits. On-premises server business is projected to grow in the low to mid-single digit range, driven by demand for hybrid offerings.
More Personal Computing revenues are expected between $14.15 billion and $14.45 billion. The company expects overall Windows OEM revenues to increase in the high single-digit range.
Windows commercial products and cloud services are expected to grow in low double-digit range, driven by demand for Microsoft 365 and advanced security solutions.
Search advertising revenues, excluding TAC, are anticipated to grow in the mid to high-teens range.
Surface revenues are anticipated to grow in the mid-teens range, driven by strong demand for premium devices.
Gaming revenues are anticipated to be up in mid-single digits.
Management expects COGS between $15.5 billion and $15.7 billion. Operating expenses are anticipated in the range of $13.4-$13.5 billion. Unfavorable forex is expected to hurt COGS and operating expense growth by 1%, respectively.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
VGM Scores
Currently, Microsoft has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Microsoft has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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