Microsoft's Cloud Growth Continues to Pay Dividends

When Microsoft (MSFT 1.65%) reported its financial results late last month, expectations were already high. Cloud computing, which underpins much of the company's business, continued its impressive growth streak. This helped Microsoft easily surpass investor expectations.

In this Earnings Review episode that aired on Fool Live on Oct. 28, Fool.com contributors Danny Vena and Asit Sharma discuss Microsoft's impressive results, and how its pivot to the cloud has been a boon to investors.

Danny Vena: Microsoft announced after the close of the market yesterday, the headline numbers were better than expected. They reported revenue of $37.2 billion, which was an increase of about 12% year over year and their earnings per share of $1.82 was up 32%. Both of these numbers were ahead of what management had forecast and analysts consensus estimates. It was a billion and a half dollars more than what analysts expected, and the earnings per share of $1.82 beat consensus of $1.54. That was a pretty solid top- and bottom-line beat.

Just to dip into the segments just a minute. The company's productivity and business processes generated about $12 billion, up about 11 percent. Intelligent Cloud continued to make headlines, generated $13 billion, an increase of about 20%. Then the more personal computing segment was $11.8 billion, up about 6%.

Now, there were a couple of big highlights there. First of all, the company's commercial cloud, led by Azure, generated about $15 billion. Now, this commercial cloud really cuts across several segments, so they break it out. So $15.2 billion, up 31%, which was higher than any of their individual segment growth. You can see that cloud is really driving this train, up 31%. That gives them a run rate of more than $60 billion a year in commercial cloud revenue and they're generating gross margins that keep inching up. Right now, the gross margin is about 71%. So Azure revenue grew 48% year over year, ticked up slightly from the 47% growth last quarter.

Two other points of note. The first was Xbox content and services revenue grew by 30%. We've seen a number of things related to the pandemic that have really pushed higher. Cloud computing is obviously one of those, gaming is another. Xbox has done really well so far this year. Also the Surface, their laptop and convertible notebook family of products, revenue was up 37%.

When you look at this growth, it doesn't sound all that remarkable until you consider the fact that Microsoft is a $1.5 trillion company. This is the third largest company traded on U.S. markets behind just Apple (AAPL 0.64%) and Amazon (AMZN 1.30%). I had to check this morning, because they trade places sometimes. But third highest market cap for publicly traded companies in the U.S. and they're still growing at a remarkable rate.

Now, the stock really didn't do that well this morning in the wake of their earnings and that's because the company was conservative in their revenue guidance. At the midpoint, they forecast revenue of $39.95 billion, just short of $40 billion, and that's an increase of only about eight percent. Now the fact that revenue this quarter was up 12%, and then they forecast growth for the coming quarter of about 8%. The market gets a little iffy about uncertainty. That gave them a little bit of that uncertainty. One of the things that they talked about on the call is, they're expecting a little bit softer business demand because of COVID, because they really don't have a handle on the pandemic yet. They think that could cut into Windows licensing revenue.

All in all, again, it was a very solid quarter for Microsoft. It was better than expected. They continue to push into cloud and they really spent a lot of time and energy over the last several years focusing on that cloud business, and it's really paying dividends over the past five plus years. The company has really pivoted into the cloud, and cloud is what's really paying the bills right now. I was really impressed, and I actually bought Microsoft stock again back within the last two or three months based on their solid execution.

Asit Sharma: Nice. I'm Microsoft holder as well, it's one of my very favorite dividend stocks. Speaking of paying dividends.