Microsoft: No Clouded Judgement Here

Written by: Sophie Lund-Yates | Hargreaves Lansdown

First quarter revenue rose 20% to $45.3bn, ignoring the effect of exchange rates, faster than market expectations for 18% growth. There was double digit growth in every division. Group operating profit rose 24% to $20.2bn. 

Revenue in the Productivity & Business Processes division reached $15.0bn, up 20%. That reflects growth in Office Commercial products and cloud services, especially Office 365 products, which rose 21%. LinkedIn revenue was up 39%, thanks to strong growth in Marketing Solutions, while Dynamics products rose 29%. Operating profits were up 32.9% and reached $7.6bn. 

Intelligent Cloud operating profit rose 39.5% to $7.6bn, reflecting a 29% climb in revenue, largely because of Azure and other cloud service growth. 

The More Personal Computing business was the weakest performer, with revenue rising 11% to $13.3bn. Within the division search and news advertising revenue did well, rising 39%. Operating profit was $5.1bn, up from $4.7bn last year. 

Microsoft generated free cash flow of $18.7bn in the quarter and had net cash of $77.3bn. The group returned $10.9bn to shareholders via share repurchases and dividends – up 14% compared to last year. 

The shares rose 1.4% in after-hours trading. 

“There are some real benefits that come with selling software the world truly doesn’t know how to function without. Microsoft has recorded another incredible quarter of revenue growth, and thanks to the capital-light model that comes with selling software, profits have been hauled upwards too. 

What’s really exciting is Microsoft’s foray into the world of cloud computing. Its initial position as a global computer software powerhouse, means it had perhaps the easiest cross-selling opportunity ever seen when it decided it wanted to sell virtual storage and solutions to customers already tied into Excel and Word. But Microsoft has taken the opportunity and run with it, buoyed by the home working and learning culture brought on by Covid. The opportunity for both the top line and margins is enormous. 

The group was keen to point out its resilience in the face of rising inflation. While we understand the argument that businesses may turn to Microsoft’s digital solutions to boost productivity in tough times, the exact effects are yet to be seen. If interest rate rises are more pronounced than expected in the wake of the inflationary problems, this would have a negative effect for stocks almost across the board – and tech-heavy “exciting” names like Microsoft and its peers could feel the worst of that in the short-term.”

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