Microsoft Corp.’s earnings easily surpassed estimates on Tuesday, but shares still fell in after-hours trading following a string of record closing prices.
Microsoft MSFT, +0.16% on Tuesday reported fiscal third-quarter earnings of $15.46 billion, or $2.03 a share, up from $1.40 a share a year ago, with profit buttressed by a $620 million net income-tax benefit. Without that tax gain, Microsoft would have reported earnings of $1.95 a share, still ahead of estimates. Revenue for the quarter was $41.7 billion, up from $33.06 billion in the same quarter last year.
Analysts on average expected earnings of $1.78 a share on sales of $41.04 billion, according to FactSet. Shares fell more than 3% in after-hours trading immediately following the release of the report, though those losses lessened later in the extended session, after Microsoft issued quarterly guidance that beat analyst estimates.
Analysts suggested Tuesday afternoon that Wall Street expected a bigger revenue beat from Microsoft, with Evercore ISI analysts writing in a note that “the top line beat was perhaps a bit below buy-side expectations,” and Wedbush analyst Dan Ives writing that the stock was “selling off after-hours in knee-jerk fashion as the Street was hoping for a bigger top-line beat.”
The stock had closed at a record high for a third consecutive session, with a 0.2% daily gain to $261.97. Microsoft stock is on track for its sixth consecutive positive month, which would be its strongest run since an eight-month streak that ended in January 2020.
Microsoft shares have largely been trading at or near record highs for months, amid strong gains for personal-computer sales, collaboration software and cloud-computing adoption during the COVID-19 pandemic. In the holiday season, Microsoft surpassed $40 billion in quarterly sales and $15 billion in quarterly profit for the first time, pushing shares to a then-record; it repeated the performance in the first calendar quarter of 2021, though revenue came up short of the record holiday-quarter sales.
Microsoft’s cloud-computing product, Azure, grew sales 50% in the first three months of the year, the company disclosed. Microsoft does not provide raw numbers for Azure performance, unlike rivals like Amazon.com Inc.’s AMZN, +0.25% Amazon Web Services and Alphabet Inc.’s GOOG, -0.84% GOOGL, -0.82% Google Cloud. The segment that includes Azure —which also wraps in sales of on-premises servers and other businesses — reported total revenue of $15.1 billion, up from $12.28 billion a year ago. Analysts on average expected “Intelligent Cloud” sales of $14.93 billion, according to FactSet.
Microsoft’s “Productivity and Business Solutions” segment, which includes Office and other cloud-software products, reported revenue of $13.6 billion, up from $11.74 billion a year ago. Analysts on average expected sales of $13.49 billion, according to FactSet. In the “More Personal Computing” segment, which includes Windows as well as Xbox and Surface revenue, Microsoft reported revenue of $13 billion, up from $11 billion a year ago. Analysts on average projected revenue of $12.55 billion, FactSet reported.
While a strong market for PCs helped the latter segment, big gains for Xbox helped as well, with the new Xbox Series X and Series S consoles leading to hardware sales more than tripling and continued growth in software and services.
“In gaming, we continue to see record engagement and strong monetization across our platform as well as demand that significantly exceeded supply for Xbox Series X and S consoles,” Chief Financial Officer Amy Hood said in a conference call Tuesday, later adding that she expects demand to outstrip supply in the current quarter.
Overall, analysts expect that the bump experienced by some Microsoft products as companies moved to a work-from-home environment will be replaced by companies looking to reboot plans for large changes to its business overall.
“In many cases, we are seeing enterprises accelerate their digital transformation (larger deals) and cloud strategy with Microsoft by 6 to 12 months as the prospects of a semi-remote workforce for the foreseeable future looks here to stay and Redmond hits its next stage of growth in the cloud,” Wedbush’s Ives wrote in a preview of the earnings report last week.
“Over a year into the pandemic, digital adoption curves aren’t slowing down. They’re accelerating, and it’s just the beginning,” Chief Executive Satya Nadella said in Tuesday’s announcement.
Hood guided for fiscal fourth-quarter revenue of $43.6 billion to $44.5 billion, breaking down as “Intelligent Cloud” revenue of $16.2 billion to $16.45 billion, “More Personal Computing” revenue of $13.6 billion to $14 billion, and “Productivity and Business Solutions” sales of $13.8 billion to $14.05 billion. Analysts on average were forecasting fiscal fourth-quarter earnings of $1.78 a share on sales of $42.98 billion.
Microsoft stock has gained 50.5% in the past year, as the Dow Jones Industrial Average DJIA, +0.01% — which counts Microsoft as a component — has increased 40.8% and the S&P 500 index SPX, -0.02% has moved 45.5% higher.