A month has gone by since the last earnings report for Microsoft (MSFT Quick QuoteMSFT - Free Report) . Shares have lost about 7.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Microsoft due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Microsoft's Q3 Earnings & Revenues Surpass Estimates

Microsoft reported third-quarter fiscal 2022 earnings of $2.22 per share, which beat the Zacks Consensus Estimate by 1.83%. The bottom line climbed 9.4% on a year-over-year basis.

Revenues of $49.360 billion increased 18.4% year over year and surpassed the Zacks Consensus Estimate by 0.81%. On a non-GAAP basis and at constant currency (cc), revenues increased 21% year over year. Unfavorable forex hurt revenues by $302 million in the reported quarter.

Microsoft’s third-quarter earnings were negatively impacted by the Nuance acquisition (closed on Mar 4) to the tune of a penny. Unfavorable forex hurt earnings by three cents per share while negative impact from the suspension of all new sales and services in Russia was a penny.

Commercial bookings climbed 28% year over year (up 35% at cc). Nuance benefited bookings by roughly 5%.

Commercial remaining performance obligation amounted to $155 billion, up 32% year over year (up 34% at cc). Commercial revenue annuity mix was 96%, up 2% year over year, owing to the ongoing shift to cloud infrastructure.

Microsoft cloud revenues were $23.4 billion, up 32% year over year.

Segmental Details

The Productivity & Business Processes segment, which includes the Office and Dynamics CRM businesses, contributed 32% to total revenues. Revenues increased 16.5% (up 19% at cc) on a year-over-year basis to $15.79 billion.

Office Commercial products and cloud services revenues rose 12% (up 14% at cc) on a year-over-year basis.

Office 365 commercial revenues rallied 17% (up 20% at cc), driven by Office 365 Commercial seat growth of 16%. Continued momentum in small and medium business, as well as in frontline worker offerings, drove top-line growth. Revenue per user grew in the reported quarter.

Office Consumer products and cloud services revenues rose 11% (up 12% at cc), driven by growth in Microsoft 365 subscription revenues. Microsoft 365 Consumer subscribers totaled 58.4 million, up 16% year over year.

Dynamics products and cloud services business increased 22% (up 25% at cc) year on year. Dynamics 365 revenues surged 35% (up 38% at cc).

LinkedIn revenues advanced 34% from the year-ago quarter’s levels (up 35% at cc), driven by continued strength in Marketing Solutions and better-than-expected performance in Talent Solutions. LinkedIn sessions grew 22% with record engagement.

The Intelligent Cloud segment, including server and enterprise products and services, contributed 38.6% to total revenues. The segment reported revenues of $19.051 billion, up 26% (same percentage at cc) year over year.

Server product and cloud services revenues rallied 29% year over year (up 32% at cc). The high point was Azure and other cloud services’ revenues, which surged 46% year over year (up 49% at cc). The upside was driven by robust growth in consumption-based business.

Server products revenues increased 5% year over year on strong demand for hybrid offerings.

Enterprise mobility installed base rallied 25% to more than 218 million seats.

Enterprise service revenues increased 8% (up 7% at cc) in the reported quarter, owing to growth in Enterprise Support Services.
    
More Personal Computing segment, which primarily comprises Windows, Gaming, Devices and Search businesses, contributed 29.4% to total revenues. Revenues were up 11.4% (same percentage at cc) year over year to $14.520 billion, driven by strength in gaming and Windows OEM.

Windows commercial products and cloud services revenues increased 14% year over year (up 19% at cc) on the back of higher customer adoption of Microsoft 365 offerings.

Windows OEM revenues were up 11% on a year-over-year basis owing to strength in the commercial PC market.

Search advertising revenues, excluding traffic acquisition costs (TAC), increased 23% (up 25% at cc) on recovering advertising market.

Surface revenues were up 13% (up 18% at cc) year over year.

Gaming revenues increased 6%. Revenues from Xbox hardware grew 4% (up 6% at cc), driven by strong Xbox Game Pass subscriptions and first-party titles.

Xbox content and services revenues were up 4% year over year.

Operating Results

Gross profit increased 17.7% year over year to $33.75 billion. Gross margin was 68.4%, down 40 basis points (bps) on a year-over-year basis. Microsoft cloud gross margin was 70%, slightly down year over year.

Operating expenses increased 15.2% year over year to $13.38 billion, driven by investments in cloud engineering, LinkedIn and commercial sales.

Operating margin expanded 40 bps on a year-over-year basis to 41.3%.

Productivity & Business Process operating income rose 19.2% to $7.18 billion. Intelligent Cloud operating income surged 28.9% to $8.28 billion. More Personal Computing operating income inched up 6.6% to $4.90 billion.

Balance Sheet & Cash Flow

As of Mar 31, 2022, Microsoft had total cash, cash equivalents and short-term investments balance of $104.7 billion compared with $125.4 billion as of Dec 31, 2021.

As of Mar 31, 2022, long-term debt (including current portion) was $49.93 billion compared with $48.26 billion as of Dec 31, 2021.

Operating cash flow during the reported quarter was $25.4 billion compared with $14.5 billion in the previous quarter. Free cash flow during the quarter was $20 billion compared with $8.6 billion in the prior quarter.

In the reported quarter, the company returned $12.4 billion to shareholders in the form of share repurchases ($7.8 billion) and dividends payouts ($4.6 billion).

Guidance

For fourth-quarter fiscal 2022, unfavorable forex is expected to hurt revenue growth by 2%. Unfavorable forex is expected to hurt Productivity and Business Processes revenues by 3%, while Intelligent Cloud and More Personal Computing revenue growth is expected to be in the tune of 2%.

The Russia-Ukraine conflict is expected to hurt revenues by $110 million and have minimal impact on operating expenses in the current quarter.

Productivity and Business Processes revenues are anticipated between $16.65 billion and $16.9 billion.

Office Commercial revenue growth is expected to be driven by Office 365, with healthy seat growth across customer segments and higher average revenue per user growth in E5.

Office 365 revenue growth is expected to be sequentially lower by 1% or 2% on a constant-currency basis.

Office consumer revenues are expected to grow in the high single digits, driven by Microsoft 365 subscriptions.

LinkedIn revenue growth is expected in the high 20s, driven by the strong job market and healthy engagement on the platform. Dynamics revenue growth is expected to be similar to the reported quarter.

Intelligent Cloud revenues are anticipated between $21.1 billion and $21.35 billion.

Azure revenue growth is expected to be down 2% sequentially on a constant-currency basis due to unfavorable forex. Overall, Azure revenues will continue to be driven by strong growth in consumption business.

Server business revenues are expected to decline in the low-to-mid single digits range. Enterprise Services revenues are expected to grow in the high single digits range.

More Personal Computing revenues are expected between $14.65 billion and $14.95 billion. The company expects overall Windows OEM revenues to increase in the low to mid-single digit range driven by the continued shift to a commercial-led PC market where revenue per license is higher.

Windows commercial products and cloud services revenues are expected to grow in low double-digit range, driven by demand for Microsoft 365 and advanced security solutions.

Search advertising revenues, excluding TAC, are anticipated to grow roughly 20%.

Surface revenues are anticipated to grow in the low double digits.

Gaming revenues are anticipated to decline in the mid-to-high single digits range, driven by lower engagement hours year over year, as well as constrained console supply.

Microsoft expects Xbox content and services revenues to decline in mid-single digits though engagement hours are expected to remain higher than pre-pandemic levels.

Management expects cost of revenues between $16.6 billion and $16.8 billion. Operating expenses are anticipated to be $14.8-$14.9 billion. Unfavorable forex is expected to hurt cost of revenues and operating expense growth by 1% each.

Microsoft continues to expect the Nuance acquisition to be minimally dilutive in fiscal 2022 and accretive in fiscal 2023 to non-GAAP earnings.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, Microsoft has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Microsoft has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.