A month has gone by since the last earnings report for Microsoft Corporation (MSFT - Free Report) . Shares have added about 4.3 % in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is MSFT due for a pullback? Before we dive into how investors and analysts have reacted 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 delivered third-quarter fiscal 2018 earnings of 95 cents per share, which beat the Zacks Consensus Estimate by a dime. The figure rallied 35.7% on a year-over-year basis.
Revenues of $26.82 billion increased almost 15.5% from the year-ago quarter (up 13% in constant currency or cc). Further, the figure exceeded the Zacks Consensus Estimate of $25.71 billion.
Commercial bookings surged 26% (18% at cc). Commercial unearned revenues were $20.04 billion, up 17% year over year at cc. Commercial revenue annuity mix was 89%, up 2 points year over year driven by an increased mix of cloud offerings.
Commercial cloud revenues were $6 billion, up 58% year over year (55% at cc), reflecting solid growth in the United States, Western Europe and the U.K.
Azure, Office 365 Drives Growth
Productivity & Business Processes includes the Office and Dynamics CRM businesses. Revenues jumped 16.9% (up 14% at cc) on a year-over-year basis to $9 billion.
The Commercial business (products + Office 365 & related cloud services) revenues were up 14% from year-ago level (up 12% cc). Office 365 commercial revenues grew 42% (40% at cc) driven by strong installed base growth and average revenues per user (ARPU) expansion primarily due to customer migration to premium workloads in E3 and E5. Office 365 Commercial seat grew 28% on a year-over-year basis.
The Consumer business revenues advanced 12% (9% at cc) year over year in the quarter. Office 365 consumer subscribers are now at 30.6 million, while Office 365 commercial now has more than 135 million monthly active users.
Dynamics business grew 17% (14% at cc). Dynamics 365 revenues soared 65% (62% at cc).
Adoption of Teams solution has been impressive, with almost 200K organizations in 181 markets using the solution, including the likes of Maersk and General Motors.
Teams has been enabled for a broad spectrum of calling and meeting room devices. Microsoft is building AI-powered services into Teams and has integrated Microsoft Stream, the company’s enterprise video service, for transcription and time-coding of recorded meetings.
LinkedIn revenues surged 37% from the year-ago quarter (33% at cc) to $1.34 billion. LinkedIn sessions were up more than 30% reflecting acceleration in engagement.
Moreover, engagement across the platform is strong, with 65% year-over-year growth in jobs, visitors across mobile and desktop, 60% growth in feed update views and nearly 40% growth in messages sent.
Intelligent Cloud includes server as well as enterprise products and services. The segment reported revenues of $7.89 billion, up 17.3% (15% at cc) year over year.
Commercial cloud annualized revenue run rate reached $20.4 billion, achieving company goal set in fiscal 2015.
Server product and cloud services revenues went up 20% year over year (up 17% at cc). The high point was Azure revenues, which soared 89% at cc on a year-over-year basis. Microsoft stated that Azure premium revenues grew triple digits for the 15th consecutive quarter. Data center expansion continues with Azure now in 50 regions globally, more than any other cloud provider.
On-premise server products revenues increased 3% (up 1% at cc) driven by customer demand for hybrid solution as well as increasing virtualization needs.
Enterprise Mobility install base grew 55% year over year to more than 65 million.
Moreover, enterprise service revenues increased 8% (5% at cc) in the reported quarter, due to growth in premier support services and Microsoft consulting services.
Microsoft has been building its forte into cloud security. The company recently announced Microsoft Secure Score attack simulator, and Windows Defender ATP automatic detection and remediation capabilities. The company has also added compliance capability feature into cloud services. The additional features have helped the company win customers like Coca-Cola.
More Personal Computing comprises mainly the Windows, Gaming, Devices and Search businesses. Revenues were up 13% (11% at CC) year over year to $9.92 billion. Excluding phone business, revenues grew 3%.
Windows OEM pro revenues increased 11% on a year-over-year basis. Windows OEM revenues increased 4% (same at cc). Moreover, windows commercial products and cloud services revenues increased 21% on a year-over-year basis (17% at cc) driven by higher volume of multi-year agreements.
Windows 10 Commercial monthly active devices grew 79% year over year.
Gaming revenues increased 18% (16% at cc) driven by robust performance from Xbox software and services (up 21% at cc). Xbox Live monthly active users were up 13% to 59 million active users.
Surface revenues surged 32% (27% at cc) from the year-ago quarter.
Search advertising revenues excluding traffic acquisition costs (TAC) revenues grew 16% (14% at cc) as both search volume and revenues per search (RPS) improved.
Microsoft’s gross margin of 65.4% expanded 2 points from the year-ago quarter, primarily owing to growth in Productivity & Business Process segment partially offset by weak Intelligent Cloud.
Productivity & Business Process gross margin increased due to improvements in Office 365 and LinkedIn. However, Intelligent Cloud segment gross margin declined owing to higher mix of cloud offerings, partially mitigated by solid improvement in Azure gross margin. More Personal Computing gross margin remained unchanged year over year.
Commercial cloud gross margin was 57%, up 6 points year over year due to improvement across Azure, Office 365 and Dynamics 365.
Operating expenses of $9.26 billion were up 9.8% (up 8% at cc) from the year-ago quarter driven by higher investments in commercial sales capacity, cloud engineering and LinkedIn. As percentage of revenues, operating expenses decreased 180 basis points (bps) from the year-ago quarter.
As a result, operating margin expanded 200 bps on a year-over-year basis to 30.9%.
Productivity & Business Process operating income grew 23% (up 19% at cc). Intelligent Cloud operating income increased 24% (up 21% at cc). More Personal Computing operating income increased 24% (up 20% at cc).
Microsoft ended with cash and short-term investments balance of $138.5 billion, up $5.5 billion from the previous quarter.
Free cash flow increased 3% year over year to $9.2 billion, primarily attributable to higher collections from customers following billings growth.
The company returned $6.3 billion to shareholders in the form of share repurchases and dividends in the reported quarter.
For the fourth quarter of fiscal 2018, Microsoft anticipates foreign exchange to increase revenues growth by 3 points, COGS by 1 point and operating expenses by 1 point.
Management expects strong performance from the commercial business. Commercial unearned revenues are expected to increase 38–39% sequentially.
Commercial cloud gross margin is projected to remain flat sequentially.
Productivity and Business Processes revenues are expected between $9.55 billion and $9.75 billion. Office 365 commercial growth is anticipated to normalize. Dynamics revenue is expected to grow double digit, driven by the ongoing shift to Dynamics 365. LinkedIn growth is envisioned to remain strong.
Intelligent Cloud revenues are projected between $8.95 billion and $9.15 billion, with another quarter of high-teens revenue growth across server products and cloud services. Management expects Azure revenue growth to reflect strength in infrastructure, data and application services, and moderating growth in Microsoft’s per user-based services like EMS.
More Personal Computing revenues are anticipated between $10.3 billion and $10.6 billion. Windows OEM Pro and non-Pro revenues should track roughly in-line with the third-quarter results.
Surface revenues expected to be up in the high teens, as the transition to the new products continues. Management expects mid-teens revenues growth in search ex-TAC.
Gaming revenues are anticipated to grow at a higher rate due to benefits from third-party game title performance and improving user engagement.
Microsoft expects COGS in the range of $9.6-$9.8 billion and operating expenses in the range of $9.8-$9.9 billion.
Management expects effective tax rate to be roughly 16% for the fourth-quarter.
Microsoft provided some perspectives for fiscal 2019. Continuing transition to cloud services is expected to drive top-line growth. Microsoft’s unique position as a hybrid cloud solution provider is expected to drive server products and cloud services revenues.
Office 365, Dynamics 365, and LinkedIn will also continue to drive double-digit revenue growth in Productivity and Business Process segment.
Moreover, gross margin percentage of commercial cloud service will continue to improve driven by increasing consumption of Azure IaaS and PaaS. Management anticipates revenue mix shift to Azure to moderate commercial cloud gross margin growth rate.
Finally, Microsoft expects effective tax rate to be slightly below the new U.S. corporate tax rate of 21% for fiscal 2019.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been 12 revisions higher for the current quarter In the past month, the consensus estimate has shifted by 8.22% due to these changes.
At this time, MSFT has a nice Growth Score of B, a grade with the same score on the momentum front. The stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is equally suitable for growth and momentum investors.
Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Notably, MSFT has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.