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Microsoft Jumps on Strong Windows Growth and Cloud Strength

By Danny Vena - Apr 26, 2019 at 5:00PM

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The tech giant's various segments take turns at being the standout performer.

Microsoft (MSFT 2.03%) reported the results of its fiscal third quarter (which ended March 31) on Wednesday, and the tech bellwether proved once again that its combination of business software and cloud-computing continues to gain ground. Investors were enthusiastic about the results, pushing Microsoft's market cap briefly above $1 trillion on the day following the release.

The tech giant reported revenue of $30.6 billion, up 14% year over year. This again beat the high end of both Microsoft's guidance and analysts' consensus estimates, which topped out at $30.1 billion and $29.8 billion, respectively. Much of the company's revenue gains worked their way down to the bottom line, with net income of $8.8 billion that increased 19% year over year, resulting in earnings per share of $1.14, up 20% -- also easily surpassing expectations of $1.00. 

The Microsoft logo outside the company headquarters

Image source: Microsoft.

Across-the-board strength

Microsoft continued to demonstrate solid growth across each of its segments, something that has become common practice for the company in recent years.

The productivity and business processes segment generated revenue of $10.2 billion, up 14% year over year and 15% in constant currency. Several smaller businesses within the segment produced notable results. LinkedIn revenue grew 27% year over year and 29% in constant currency, driven higher by record levels of engagement, as sessions grew by 24%. Both commercial and consumer versions of Office did well, growing 12% and 8% year over year, respectively. Dynamics products held their own, climbing 13% compared to the prior-year quarter.

Intelligent cloud produced the most impressive gains, growing to $9.7 billion, up 22% year over year. Within the segment, server products and cloud services jumped 27% compared to the prior-year quarter. Azure again took the spotlight, with revenue up 73% year over year and 75% in constant currency. Enterprise services edged higher, with revenue up 4%.

Personal computing saw the most modest increases, growing revenue to $10.7 billion, up 8% year over year and 9% in constant currency. Surface computers saw the biggest gains, up 21%, while search advertising revenue grew 12%.

Microsoft's "commercial cloud" business, which crosses segment boundaries and includes revenue from Azure, Office 365, and LinkedIn, was $9.6 billion for the quarter, up 41% year over year, but down from 48% growth sequentially. Gross margin for commercial cloud also improved, increasing 5% year over year to 63%, driven by significant improvement in Azure's gross margin. 

Azure continues to see significant adoption. On the conference call to discuss the results, Microsoft CEO Satya Nadella said, "More than 95% of the Fortune 500 run their workloads on our cloud."

What the future could hold

For its fiscal fourth quarter (which ends on June 30) Microsoft is guiding for revenue in a range of $32.2 billion to $32.9 billion, which would represent growth of between 7% and 9%. The company is also forecasting cost of goods sold of $10.75 billion and operating expenses of $10.75 billion, both at the midpoint of its guidance. This would result in operating income of about $11.05 billion, also at the midpoint of its guidance.

While investors don't want to be seduced by Wall Street's short-term mindset, understanding Wall Street sentiment can help put the numbers into context. For the upcoming fiscal fourth quarter, analysts' consensus estimates are calling for revenue of $32.63 billion, up 8.4% year over year, and earnings per share of $1.18, up 4.4%.

Microsoft has seen something of a renaissance in recent years, combining its more recent success in cloud-computing with its legacy software to once again become a business powerhouse. There isn't any reason to believe that will change any time soon.

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