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Why Is Microsoft (MSFT) Up 5.5% Since Last Earnings Report?

Microsoft (MSFT) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

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This story originally appeared on Zacks

A month has gone by since the last earnings report for Microsoft (MSFT). Shares have added about 5.5% in that time frame, outperforming the S&P 500.

- Zacks

Will the recent positive trend continue leading up to its next earnings release, or is Microsoft due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Microsoft Q4 Earnings Beat, Azure & Teams Aid Top Line

Microsoft reported fourth-quarter fiscal 2021 earnings of $2.17 per share, which beat the Zacks Consensus Estimate by 14.2%. The bottom line also surged 49% on a year-over-year basis (up 42% at constant currency or cc).



Revenues of $46.152 billion increased 21% from the year-ago quarter’s levels (up 17% at cc). The top line surpassed the Zacks Consensus Estimate by 4.7%.



Strong demand trends across various geographies along with robust adoption of Azure cloud offerings drove the top line. Robust adoption of Teams app as well as strong performances from LinkedIn business and gaming segment also acted as tailwinds.



Commercial bookings climbed 30% year over year (up 25% at cc), courtesy of consistent sales execution as well as growth in Azure contracts.



Commercial remaining performance obligation amounted to $141 billion, up 32% year over year (up 31% at cc). Commercial revenue annuity mix was 95%, up 1% year over year owing to ongoing shift to cloud infrastructure.



Commercial cloud revenues were $19.5 billion, up 36% (up 31% at cc) year over year.

Segmental Details

Productivity & Business Processes segment, which includes the Office and Dynamics CRM businesses, contributed 31.8% to total revenues. Revenues increased 25% (up 21% at cc) on a year-over-year basis to $14.691 billion.



Office Commercial products and cloud services revenues climbed 20% (up 15% at cc) on a year-over-year basis. Office 365 commercial revenues rallied 25% (up 20% at cc). The upside can be attributed to strong installed base growth and average revenues per user (ARPU) expansion.



E5 revenue growth was driven by strength in advanced security, compliance, and voice components. E5 now constitutes 8% of the Office 365 commercial installed base, added the company.



Paid Office 365 Commercial seats improved 17% 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 18% (up 15% at cc), driven by growth in Microsoft 365 subscription revenues.  Microsoft 365 Consumer subscribers totaled 51.9 million, up 22% year over year.



Dynamics products and cloud services business increased 33% (up 26% at cc) year on year. Dynamics 365 revenues surged 49% (42% at cc) Dynamic 365 now comprises more than 70% to total Dynamics revenues, noted Microsoft.



LinkedIn revenues advanced 46% from the year-ago quarter’s levels (up 42% at cc). The better-than-expected performance was driven by improving advertising and job market scenarios.



Microsoft is gaining from expanding user base of different applications including Microsoft 365 E5 and Teams. Both solutions continue to witness record adoption. The uptick can be attributed to continuation of work-from-home as well as mainstream adoption of hybrid work policies. The company noted that Microsoft Teams has monthly active user base of 250 million at the end of the fourth quarter.



Integration of Teams with Microsoft’s various inhouse offerings — PowerPoint presentations, SharePoint, Stream, Dynamics 365 — makes it a winner as it facilitates easy collaboration and engagement, while driving outcomes and saving time.



Microsoft’s Power Platform reported revenue growth of 83% year over year for fiscal 2021



Intelligent Cloud segment, which includes server, and enterprise products and services, contributed 37.6% to total revenues. The segment reported revenues of $17.375 billion, up 30% (up 26% at cc) year over year.



Server product and cloud services revenues rallied 34% year over year (up 29% at cc). The high point was Azure's revenues, which surged 51% year over year (up 45% at cc), driven by robust growth in consumption-based business.



On-premises server products revenues increased 16% (up 12% at cc) year over year, on strong annuity performance and higher in-period revenue recognition.



Enterprise mobility installed base revenues rallied 29% to more than 190 million seats.



Enterprise service revenues increased 12% (up 9% at cc) in the reported quarter, owing to growth in Microsoft Consulting Services and Premier Support Services.



More Personal Computing segment, which primarily comprises Windows, Gaming, Devices and Search businesses, contributed 30.6% to total revenues. Revenues were up 9% (up 6% at cc) year over year to $14.086 billion, driven by strength in online gaming trends and Windows Commercial.



Windows commercial products and cloud services revenues increased 20% year over year (up 14% at cc), on the back of higher customer adoption of Microsoft 365 offerings and higher in-period revenue recognition.



Windows OEM revenues declined 3% on a year-over-year basis owing to supply chain disruptions.



Windows OEM non-Pro revenues fell 4%, while Windows OEM Pro revenue declined 2%.



Search advertising revenues, excluding traffic acquisition costs (TAC), increased 53% (up 49% at cc) on recovering advertising market.



Surface revenues fell 20% (down 23% at cc) from the year-ago quarter’s levels to $1.376 billion due to tougher year-over-year comparisons.



Gaming revenues increased 11% (up 7% at cc) driven by increased engagement levels. Revenues from Xbox hardware soared 172% (up 163% at cc), driven by the new consoles.



Xbox content and services revenues declined 4% year over year (down 7% at cc), due to tougher year-over-year comparisons.

Operating Results

Gross margin increased 25% (up 20% in cc) to $32.2 billion. This can be attributed to revenue growth across Productivity & Business Processes, Intelligent Cloud and More Personal Computing segments. Non-GAAP gross margin (in percentage terms) of 70% was up 200 basis points (bps) on a year-over-year basis, on change in accounting estimate.



Commercial cloud gross margin was 70%, up 400 bps year over year, driven by improvement across all cloud services.



Operating margin expanded 600 bps on a year-over-year basis to 41%.



Productivity & Business Process operating income grew 62% (up 53% at cc) to $6.44 billion. Intelligent Cloud operating income surged 46% (up 39% at cc) to $7.79 billion.



More Personal Computing operating income rallied 19% (up 13% at cc) to $4.87 billion. Gross margin (as a percentage of segment income) fell slightly on a year-over-year basis, as sales mix moved to Gaming.

Balance Sheet & Free Cash Flow

As of Jun 30, 2021, Microsoft had total cash, cash equivalents, and short-term investments balance of $130.3 billion, compared with $125.4 billion as of Mar 31, 2021. As of Jun 30, 2021, long-term debt (including current portion) was $58.15 billion compared with $58.06 billion as of Mar 31, 2021.



Operating cash flow during the reported quarter was $22.7 billion compared with $22.2 billion in the previous quarter. Free cash flow during the quarter was $16.3 billion compared with $17.1 billion in the prior quarter.



In the reported quarter, the company returned $10.4 billion to shareholders in the form of share repurchases ($6.2 billion) and dividends payouts ($4.2 billion).

Guidance

For first-quarter fiscal 2022, Productivity and Business Processes revenues are anticipated between $14.5 billion and $14.75 billion. Strong upsell opportunity for Microsoft E5 and momentum in Office 365 is expected to drive growth in Office commercial.



On-premises business is anticipated to decline 20% due to customers’ shift to cloud.



Office consumer revenues are expected to witness growth in high single digit range driven by increases in Microsoft 365 subscription revenues.



LinkedIn revenue growth is anticipated to be in high-30% range driven by improving ad and jobs market. Revenue growth for Dynamics is expected to be high-20% driven by continued Dynamics 365 momentum.



Intelligent Cloud revenues are anticipated between $16.4 billion and $16.65 billion. Azure's revenue growth is likely to reflect continued strength in the consumption-based services.



Gains from Microsoft 365 suite adoption is 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, management expects revenues to be up in high single digits. On-premises server business is projected to grow in the high-single digits range driven by continued demand for hybrid and premium offerings.



More Personal Computing revenues (including $300 million estimated impact of revenue deferral of Windows 11) are expected between $12.4 billion and $12.8 billion. The company expects overall Windows OEM revenues to decline in the mid to high-single digits range.



Windows commercial products and cloud services are expected to grow in double-digit range driven by demand for Microsoft 365 and advanced security solutions.



Search advertising revenues, excluding TAC, are anticipated to grow in the high-30% range on improving advertising market.



Surface revenues are anticipated to decline in the low-teens range on a year-over-year basis due supply chain disruption.



Gaming revenues are anticipated to be up in low double digits year over year. Xbox content and services revenue are projected to increase in the low single digits range owing to tougher year over year comparisons. Demand for Xbox Series X and S will continue to be negatively impacted by supply issues.



Management expects COGS between $13.55 billion and $13.75 billion, and operating expenses in the range of $11.6-$11.7 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 6.11% due to these changes.

VGM Scores

At this time, Microsoft has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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 trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Microsoft has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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