- Microsoft delivered what was perhaps its most impressive quarter of the past five years, judging by the gap between results and expectations.
- PCs impressed as I had anticipated, while intelligent cloud beat consensus by the narrowest margin. Perhaps investors expected more of Azure.
- My bullishness goes beyond the short-term tailwinds of cloud transition and increased demand for personal computing during a COVID-19 year.
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If you think it could not get much better for Microsoft (MSFT), think again.
On October 27, after the closing bell, the Redmond-based company delivered what was perhaps its most impressive quarter of the past five years, at least. In fiscal first quarter, revenue growth of more than 12% topped consensus by around $1.4 billion, nearly tying with fiscal fourth quarter 2020 as the widest top-line beat of the past half-decade. EPS of $1.82 exceeded expectations by the widest margin since 2015, maybe longer.
At a high level, all the expectations listed in my earnings preview came to fruition. However, the extent of Microsoft’s performance above consensus estimates caught me a bit by surprise, especially on the heels of such a strong second half of fiscal 2020.
On the results of the quarter
Microsoft’s outperformance was most pronounced in the low-growth PC segment – a solid half a billion dollars in revenues above the high end of the company’s own guidance range. This was very much in line with my pre-earnings commentary that, “when it comes to the PC business, I [was] even more confident that Microsoft [would] deliver above-guidance results.”
The outperformance was a direct result of worldwide PC shipments having increased in the calendar third quarter and demand for gaming hardware and software being on fire lately. Also aligned with my expectations, top-line strength came primarily from the consumer vertical, as Windows OEM Pro revenues fell by much more than I ever remember witnessing.
With the productivity and business process segment looking as strong as ever (e.g. Office 365, Dynamics and a recovering LinkedIn up by strong double-digits), the focus of attention turned to intelligent cloud. Here, the picture was a bit blurrier. See graph on Azure’s sequential change in revenue growth rate, stated in percentage points.
