Microsoft earnings: what to watch out for?

Key learning points

  • Analysts estimate adjusted earnings per share at $1.91 versus $1.46 in the fourth quarter of 2020.
  • Microsoft Azure revenue is JOY expected to grow strongly, but slowly compared to last year’s quarter and Q3 FY 2021.
  • Revenue is expected to increase as Microsoft seeks to accelerate growth through acquisitions.

Microsoft Corp. (MSFT) has embarked on a wave of acquisitions over the past year amid strong financial performance, acquiring companies in healthcare, artificial intelligence (AI) and cybersecurity. In April, the company agreed to launch AI speech recognition company Nuance Communications Inc. (NUAN) for $16 billion. Earlier this month, Microsoft said it agreed to pay more than $500 million for security software company RiskIQ Inc. amid an increase in high-profile cyber-attacks.

Investors will assess the long-term impact of these deals and the company’s latest financial performance when it reports earnings for Q4 FY 2021 on July 27, 2021. Microsoft’s 2021 fiscal year ended on June 30. Analysts expect robust year-over-year (YOY) growth in the company’s adjusted earnings per share (EPS) and revenue.

Investors will also focus on YOY revenue growth in Azure, which is a key part of Microsoft’s cloud computing business that provides a comprehensive range of services to developers, IT professionals and enterprises. Analysts expect strong Azure revenue growth, albeit at the slowest pace in at least the past four years.

Microsoft’s stock outperformed the broader market over the past year, but that outperformance didn’t begin until late June 2021. The stock kept pace with the market from mid-July 2020 to about early November 2020. After that, it mostly underperformed until mid-2020. until the end of June 2021. Microsoft stock has delivered a total return of 44.4% over the past year, above the S&P 500’s total return of 36.4%.


Source: TradingView.

Microsoft earnings history

Shares fell after Microsoft reported financial results for Q3 FY 2021, despite beating analysts’ earnings and revenue estimates. Adjusted earnings per share were up 39.4% compared to the same quarter last year. Turnover grew by 19.1% year-on-year. It was the fastest growth rate for both metrics in at least 17 quarters. The company noted that digital adoption continued to accelerate during the ongoing COVID-19 pandemic as more and more companies move their operations to the cloud.

Microsoft also beat analysts’ earnings and revenue expectations for the second quarter of 2021. Adjusted EPS increased 34.1% year-over-year, continuing the acceleration trend that started in the previous quarter. Revenue grew 16.7%, the fastest pace since Q1 FY 2019. The company highlighted the role its comprehensive cloud platform played in accelerating the digital transformation mentioned above.

Analysts expect Microsoft’s strong financial performance to continue into the fourth quarter of 2021, albeit at a slower pace than in the third quarter. Adjusted earnings per share are expected to rise 30.7% as revenue increases by 16.4% compared to the same quarter last year. For the full year 2021, analysts predict adjusted EPS will rise 34.1% as annual sales rise 16.2%. That would be the fastest pace for both metrics in at least six years.

Microsoft Key Stats
Estimate for Q4 2021 (FY) 4th quarter 2020 (FY) Q4 2019 (FY)
Adjusted Earnings Per Share ($) 1.91 1.46 1.37
Yield ($B) 44.3 38.0 33.7
YOY Growth in Microsoft Azure revenue (%) 43.1 46.7 63.5

Source: Visible alpha

The most important statistic

As noted above, investors will also focus on revenue growth in Azure, which along with services such as SQL Server and Visual Studio is part of Microsoft’s Intelligent Cloud segment. Azure is a cloud platform that provides developers, IT professionals and enterprises with a set of tools and services that can be used for networking, storage, mobile and web application services, AI, Internet of Things (IoT), and a range of other computing needs. It captured about 20% share of the $150 billion global cloud market as of the end of the first quarter of 2021. Microsoft’s Azure is second only to Amazon.com Inc.’s (AMZN) Amazon Web Services in terms of global cloud market share. Azure is expected to benefit from another recent acquisition by Microsoft: the (T) Network Cloud technology from AT&T Inc. AT&T will still operate its network, but Microsoft will handle the wireless provider’s 5G cloud operations.

Azure has become a major growth engine at Microsoft in recent years, surpassing the company’s overall revenue growth. Despite that superior performance, the growth rate has slowed. Azure’s annual revenue grew 115.5% in FY 2016 and has declined every year since, to 56.3% in FY 2020. In Q1 FY 2021, Azure’s quarterly revenue continued that trend, at a yoy pace of 44 .9%. However, that growth started to accelerate again, rising 47.2% yoy in the second quarter and 50.4% yoy in the third quarter. Analysts expect Azure revenue to grow 43.1% in the fourth quarter of 2021, breaking the acceleration trend but still maintaining a robust pace. For the full year 2021, analysts predict Azure revenue will grow 45.2% to $29.6 billion. If analysts are correct in their estimates for Azure and company-wide revenue, Azure would represent approximately 18% of Microsoft’s total revenue.