Microsoft’s (MSFT) Q3 FY2021 Revenue: What to Expect?

When Microsoft Corporation (MSFT) reports profit on Tuesday, expectations will be high. Once the company was also active in the technical industry and the subject of much ridicule, the company is now highly regarded. It surpassed the $1 trillion market cap milestone in 2019. The pandemic shutdown further fueled demand for Microsoft’s products and the company passed the $2 trillion mark in June this year, becoming the second organization in history to do so.

Key learning points

  • Analysts expect another round of blockbuster earnings from Microsoft on Tuesday.
  • They expect double-digit profits for the company’s cloud and productivity software divisions.
  • Microsoft’s gaming revenues could be hurt by supply restrictions.

Microsoft has surpassed analyst expectations for its earnings over the past four quarters, and its stock price recently hit a record high of $284.55 after Citi analyst Tyler Radke set a price target of $378.

Radke isn’t alone in betting on continued demand for Microsoft’s products. Bank of America analyst Brad Sills has set a $325 price target for the stock, stating that the company’s revenue will exceed consensus expectations by 2% to 3%. It took Rosenblatt Securities analyst John McPeake less than three months to raise his price target for Microsoft from $301 to $333. In May, he had said that Microsoft was the world’s leading software company.

The consensus estimate for Microsoft’s earnings per share is $1.90. Analysts expect the company to report revenue of $44.1 billion, up 15.9% from a year ago. The company itself has forecast revenue of $44.5 billion at the high end of its profit scale.

A growth story

There are three pillars to Microsoft’s revenue: cloud services, productivity software, and a segment the company calls More Personal Computing, which is a mix of hardware, software, and gaming systems. All three are well placed to respond to existing trends.

Microsoft chief Satya Nadella’s commitment to the cloud over the past decade has paid rich dividends, and the division has become the largest revenue contributor to the company’s revenue. Azure, Microsoft’s cloud solution, delivers more revenue than the Windows operating system and grew exponentially during the pandemic. Sales in the March quarter increased by 50% compared to the same period a year ago. According to BofA’s Sills, it should also “surpass 50% growth this quarter.” Microsoft is the second largest cloud provider after Amazon.com, Inc. (AMZN) and according to the latest reports, the leader is approaching.

The Redmond, Washington-based giant shifted its focus to the cloud for its best-selling productivity suite a decade ago when it brought Microsoft Office online. It has since introduced more products for the platform, culminating in the recent announcement of Windows 365.

Market demand was strong. Office 365 had 300 million paid seats in the quarter and Microsoft 365, the company’s productivity suite, had more than 50 million subscribers. Video conferencing software Teams, which competes with Zoom Video Communications, Inc. (ZM), had 145 million daily active users.

An increase in IT budgets should give this segment of Microsoft’s business more leverage to increase revenue, analysts say. Rosenblatt Securities analyst John McPeake estimates that demand for Office, Teams and Dynamics is likely to grow at double digits.

The third segment of Microsoft’s business has also witnessed a pandemic surge as work-from-home policies forced people to buy more and larger devices. The company’s gaming division benefited from a lull in economic activity and office life. Gaming revenue was $3.6 billion, up 50%, during the March quarter. Minecraft, an online game that Microsoft bought for $2.5 billion in 2014, had 140 million active users in the last quarter. But the company has warned that limitations in the XBox Series X and S offerings could affect growth in its gaming division.

Despite all the optimistic expectations about the company’s performance, Microsoft itself has already warned that this quarter’s performance will be affected by changed circumstances. About this time last year, usage and revenues for Microsoft products skyrocketed due to pandemic restrictions that curtailed travel and face-to-face meetings. By contrast, several geographic areas in which the company operates have eased or lifted restrictions from last year. During the company’s earnings call last quarter, Microsoft CFO Amy Hood said Search and LinkedIn will have positive growth as the ad and job markets bounce back this quarter.