Microsoft tops $10 billion in earnings, beating even pre-coronavirus expectations

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Microsoft Corp. outperformed the financial expectations that it faced even before the coronavirus pandemic in an earnings report Wednesday, sending shares slightly higher in after-hours trading.

Microsoft MSFT, +0.60% reported fiscal third-quarter earnings of $10.75 billion, or $1.40 a share, on sales of $35 billion Wednesday, up from profit of $1.14 a share on revenue of $30.57 billion a year ago. Analysts on average expected earnings of $1.27 a share on sales of $33.76 billion, according to FactSet.

Expectations for most companies have been reduced amid the COVID-19 pandemic, though Microsoft — the only Dow Jones Industrial Average DJIA, -1.23% component to see its stock gain in the first quarter, as the coronavirus spread around the globe — was expected to weather the storm better than most. Analysts on average were expecting earnings of $1.33 a share on sales of $34.55 billion as of the end of January, which Microsoft managed to top anyway.

“In the third quarter of fiscal year 2020, COVID-19 had minimal net impact on the total company revenue,” the company disclosed, while admitting that some transactions along with advertising on LinkedIn and Bing slowed down toward the end of the quarter.

Microsoft shares rose more than 2% in after-hours trading, dipping from gains of more than 3% after Microsoft shared its outlook for the fourth quarter on a conference call. The stock has gained 12.5% this year after a 4.5% gain in Wednesday’s regular trading session, while the S&P 500 index SPX, -1.01% has declined 11.4% so far in 2020.

Some of Microsoft’s core offerings, including the Azure cloud-computing business and Teams collaboration software, are expected to fare well as workers are forced to stay home and their companies need computing power and tools to support them. Many of those products are bundled with products that may not fare as well, however — for instance, Microsoft combines revenue from on-premises server sales with its Azure business.

Microsoft in the Age of COVID-19: Push to the cloud may save Microsoft from a coronavirus crash

In Wednesday’s report, the “Intelligent Cloud” segment that includes Azure grew to revenue of $12.28 billion from $9.65 billion a year ago, beating the average analyst prediction of $11.79 billion, according to FactSet. Microsoft said that Azure sales grew by 59% from a year ago; the company does not fully break out Azure’s financial performance individually, as Inc. AMZN, +1.90% and Alphabet Inc. GOOGL, -0.73% GOOG, -0.53% do with their rival cloud-computing platforms, Amazon Web Services and Google Cloud Platform, respectively.

“Productivity & Business Solutions,” which comprises most of the cloud software assets, including LinkedIn, grew to $11.74 billion from $11.52 billion a year ago, beating the average analyst prediction of $11.53 billion. “More Personal Computing,” which includes the Windows and Xbox businesses along with Surface hardware and some other properties, grew to $11 billion from $10.68 billion a year ago, topping the average analyst prediction of $10.46 billion.

For the fiscal fourth quarter, Microsoft expects revenue of $35.85 billion to $36.8 billion, according to segment forecasts provided by Chief Financial Officer Amy Hood on a conference call Wednesday afternoon. Analysts on average were expecting sales of $36.52 billion, according to FactSet.

Hood also went into detail on the effects Microsoft expects from the COVID-19 pandemic moving forward.

“In our consumer business, we expect continued demand across Windows OEMs, Surface and Gaming to shift to remote work play and learn from home. Our outlook assumes this benefit remains through much of Q4 though growth rates may be impacted as stay at home guidelines ease,” she said. “We assume advertising spend levels for March do not improve in Q4, which will impact search and LinkedIn. In our commercial business, our strong position in durable growth markets means we expect consistent execution on a large annuity base with continued usage and consumption growth. … However, we expect the sales dynamic for March to continue including a significant impact in LinkedIn from the weak job market and increased volatility in new, longer lead-time-deal closures.”

Hood also said that Microsoft expects “a material sequential increase” in capital-expenditure spending in the current quarter “to support growing usage and demand for our cloud services.” Many companies have cut back on spending initiatives amid the COVID-19 pandemic.

Originally Published on MarketWatch

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