Microsoft beats on earnings, stock ticks up

Key Points
  • Microsoft beat estimates on the top and bottom lines, as well as revenue guidance for the next quarter.
  • Azure growth slowed to 64%.
Microsoft CEO Satya Nadella reacts during a panel session on day three of the World Economic Forum in Davos, Switzerland, on Jan. 24, 2019.
Jason Alden | Bloomberg | Getty Images

Microsoft stock rose 2% after the company released better-than-expected quarterly earnings and guidance.

Here are the key numbers:

  • Earnings: $1.37 per share, excluding certain items, vs. $1.21 per share as expected by analysts, according to Refinitiv
  • Revenue: $33.72 billion, vs. $32.77 billion as expected by analysts, according to Refinitiv

On an annualized basis revenue grew 12% in the fourth quarter of Microsoft's 2019 fiscal year, which ended on June 30, according to a statement. It's the ninth straight quarter of double-digit annualized revenue growth, according to FactSet.

Microsoft shares have gained 34% this year, pushing the company past a $1 trillion market cap as investors continue to bet on CEO Satya Nadella's ability to bolster the cloud business and win deals against Amazon.

Microsoft's Intelligent Cloud business segment, which includes the Azure public cloud, Windows Server, SQL Server, Visual Studio, GitHub and consulting services, produced $11.39 billion in revenue in the quarter. Analysts polled by FactSet had been expecting $11.02 billion in Intelligent Cloud revenue.

Revenue from Azure increased 64% year over year, the lowest growth rate in at least four years. Microsoft doesn't disclose exact revenue figures for Azure. The company did say it saw a more large and long-term Azure contracts in the quarter, in line with the past few quarters.

Ahead of earnings, analysts at Bank of America Merrill Lynch, KeyBanc Capital Markets and Stifel signaled they were expecting annualized Azure growth to fall to about 68%. The moderating Azure growth is more about the law of large numbers than falling demand, Stifel analysts led by Brad Reback, who rate Microsoft as a buy, wrote in a note distributed to clients on Sunday.

"Our partner conversations this quarter continued to emphasize Azure's momentum, which are enabling the company to significantly outpace the overall market's growth as they see Azure contract commitments seeing significant uplift in terms of contract value and duration," Goldman Sachs analysts led by Heather Bellini, who have a buy rating on Microsoft stock, wrote in a Thursday note.

The More Personal Computing business segment, which comprises Windows, Surface, Xbox and search, ended the quarter with $11.28 billion in revenue. The FactSet analyst consensus for the segment was $10.99 billion.

Microsoft's Productivity and Business Processes segment, containing Office, Dynamics and LinkedIn, came in with $11.05 billion in quarterly revenue, more than the $10.70 billion FactSet consensus estimate.

The Stifel analysts also highlighted quarterly PC shipment data that IDC released last week, which suggested 4.7% year-over-year growth, partly thanks to increased Intel chip supply. "Net/net, we view these better-than-expected results as a modest tailwind for Microsoft's Windows business for the quarter," they wrote.

Microsoft said it had $11 billion in Commercial Cloud cloud revenue, up 39% on an annualized basis. The category includes Azure, Office 365 business subscriptions, Dynamics 365 enterprise software and commercial LinkedIn products.

With respect to guidance, Microsoft's chief financial officer, Amy Hood, said on a conference call with analysts that the company expects to achieve between $31.7 billion and $32.4 billion in revenue across its three business segments in the fiscal first quarter. The midpoint of $32.05 billion is just above the $32.00 billion Refinitiv estimate.

Hood said the company's cost of goods for the fiscal first quarter would be between $10.55 billion and $10.75 billion, a range that was below the FactSet consensus estimate of $10.95 billion.

In the fiscal fourth quarter Microsoft acquired Express Logic, announced Azure updates and introduced an Xbox console that has no disc drive.

The company had $5.3 billion in capital expenditures in the quarter, more than in any other quarter in the past four years.

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