Microsoft: Riding High in the Cloud With Earnings Beat

Written by: Laura Hoy | Hargreaves Lansdown

Excluding the impact of exchange rates, third quarter revenue rose 21% to $49.4bn, driven by strong growth across all segments. Intelligent Cloud was the strongest performer, with revenue up 26% to $19.1bn.  Productivity and Business Processes and More Personal Computing rose by 16.5% and 11.4% respectively. 

Operating income rose 23% to $20.4bn, despite a 21.2% increase in research and development as well as a 25.8% rise in service costs. This was slightly ahead of market expectations. 

Microsoft returned $12.4bn to shareholders through buybacks and dividends during the period, a 25% increase.

A 29% increase in server products and cloud services meant Intelligent Cloud saw operating profits rise 28.9% to $8.3bn. The division now makes up roughly 40.7% of overall profit, up from 37.7% last year. 

Operating profits in Productivity and Business Processes, which houses the Microsoft Office suite, rose from $6.0bn to $7.2bn. Office Commercial and Consumer growth was in the low double digits, while LinkedIn saw a 35% rise in revenue. 

More Personal Computing saw a 6.6% increase in operating profits to $4.9bn. This was comprised of growth in Windows products as well as 6% increase in Xbox content and services revenue. 

Free cash flow, excluding acquisition costs, was $20.0bn, up from $17.1bn due to higher profits. Net cash was $54.8bn, down from $72.2bn. 

Microsoft beat earnings estimates in the third quarter, but the reaction’s been tepid so far. Still, you can’t fault the tech stalwart—after a busy year of acquisitions the group’s still sitting on over $50bn in cash. Cloud predictably led the way this quarter, underscoring CEO Satya Nadella’s claims that Microsoft will thrive in an environment of belt-tightening because it helps companies do more with less. There’s no question the pandemic’s pushed the world round a digital corner, and access to the cloud and Microsoft’s suite of Office products is a must. That should insulate the group’s revenue somewhat as companies start to trim the fat to cope with inflation. 

Microsoft’s gaming arm delivered respectable 6% growth. That’s about to get a whole lot heftier as Microsoft turns its attention to bolstering this part of the business. If cloud can keep up the momentum as the gaming division balloons, Microsoft could be in for a strong year.

Related: Tesla: Petal to the Metal on Innovation