Microsoft Earnings: What Happened

What Happened

Microsoft reported its Q4 FY 2020 earnings on July 22, 2020 and surpassed analysts' expectations on both adjusted earnings and sales. Its earnings according to generally accepted accounting principles (GAAP) were slightly worse as they included a $450 million charge for the permanent closure of all physical Microsoft store locations due to COVID-19. Microsoft has been pivoting to focus more on cloud services, especially its Azure cloud platform, and that seems to be paying off. Cloud services revenue slightly exceeded analysts' expectations and notably was the largest single segment of the company by revenue for FY 2020.

(Below is Investopedia's original earnings preview, published July 21, 2020)

What to Look For

Microsoft Corp. (MSFT) stock has been a standout amid the spreading COVID-19 crisis, rising about 35% in 2020 and dramatically outpacing the broader market. Much of this strong performance comes as millions of home-bound consumers and companies globally have sharply boosted demand for Microsoft products such as software, video games, and cloud services, especially its Azure cloud computing platform.

Investors are likely to closely watch the performance of the company's fast-growing Intelligent Cloud segment when Microsoft reports earnings on July 22 for Q4 FY 2020. Microsoft's fiscal year ends in June. The positive news is that analysts expect rising revenue from cloud services and companywide, albeit much slower than recent quarters. The bad news is that analysts expect virtually no growth in adjusted earnings per share (EPS).

Although Microsoft stock fell early in 2020 with the broader market, the company has more than recovered those losses with a strong performance. During the past 12 months, Microsoft has posted a total return of 54.7%, six times bigger than the 8.9% gain in the S&P 500.

Microsoft's outperformance over the past year comes amid a series of favorable reports in recent quarters. In terms of total revenue, the company has posted double-digit year-over-year (YOY) growth for the last 11 consecutive quarters. By contrast, analysts expect Q4 FY 2020 revenue to slow sharply to 8.1% YOY.

Microsoft has seen robust YOY growth to its adjusted EPS over the pasts three years, posting 22.8% growth in FY 2017, 18.2% in FY 2018 and a 22.3% increase in FY 2019. Growth has been generally strong on a quarterly basis. Recently, Microsoft's adjusted EPS rose by 37.2% and 23.2%, respectively, in Q2 and 3Q FY 2020.

That growth may end in Q4 FY 2020. Analysts expect that Microsoft to grow adjusted EPS by less than 1 percent, or by 0.4% a share to $1.38.

Source: Visible Alpha

As mentioned, when Microsoft releases Q4 FY 2020 earnings, investors will look at the performance of Microsoft's Intelligent Cloud segment as a barometer of the company's overall strength. Cloud services is one of the fastest growing areas at Microsoft and in the tech industry. To accelerate sales growth, Microsoft has focused on key areas where it can boost cloud revenue. The company has succeeded amid stiff competition from market leader Amazon Inc.'s (AMZN) Amazon Web Services (AWS). Microsoft's Azure is ranked second.

Microsoft's Intelligent Cloud segment has grown in each of the past 13 consecutive quarters, with revenue more than doubling from $6.1 billion in Q1 FY 2017 to $12.3 billion in Q3 FY 2020. Growth in this area has exceeded 26% YOY in each of the three prior quarters. While analysts expect strong growth in Q4 FY 2020, that growth will downshift sharply to 14.8%, about half the pace of the previous three quarters. While Intelligent Cloud revenue is making up a larger share of Microsoft's corporate revenue, it's unclear whether this will be enough to bolster profits long-term.