Key Takeaways

  • Microsoft reported EPS of $1.40 vs. the $1.29 expected by analysts.
  • Overall revenue surpassed expectations.
  • Microsoft's key cloud-computing segment continued its strong growth.

What Happened

Microsoft reported its FY 2020 Q3 financial results, and they were strong across the board. Earnings and overall revenue came in above analyst expectations, while Microsoft's cloud-computing section continued to grow. Investors were impressed, and Microsoft's shares are up over 7% today at time of writing, including after-market trading.

(Below is Investopedia's original earnings preview, published 4/22/20)

What to Look for

Microsoft Corp. (MSFT) has been a star performer over the past year as its stock has dramatically outpaced the broader market. But even the technology giant won't be entirely unscathed by the economic fallout resulting from the coronavirus pandemic. The company has already revised its guidance downward for its More Personal Computing segment. However, investors may be more intently focused on Microsoft's Intelligent Cloud segment when it reports earnings on April 29, 2020 for Q3 FY2020 (Microsoft's fiscal year ends in June). The company's cloud business, especially its cloud computing platform Azure, has been a key area of growth in recent years. Analysts are expecting that growth to continue, along with overall growth in earnings per share (EPS) and revenue.

Despite crashing along with the rest of the market due to the COVID-19 pandemic, shares of Microsoft are still up over the past year. The stock has posted a total return of 37.4% over the past 12 months compared to the S&P 500's total return of -5.9%.

One Year Total Return for S&P 500 and Microsoft
Source: TradingView.

Microsoft's steady upward momentum over the past year has been helped along by a string of positive earnings surprises in each of the past four quarters. The company posted year-over-year (YOY) EPS growth of 39.7% and revenue growth of 13.7% for Q2 FY2020, which ended December 31, 2019.

Results for Q1 FY2020 were also robust, with EPS growing 21.9% compared to the same three-month period in the previous year. Revenue grew 13.7% YOY. Microsoft's revenue growth has fluctuated between 11% and 19% since Q1 FY2018, a significant improvement from the single-digit rates of growth posted throughout FY2017. EPS has been more volatile, but has generally grown faster than revenue over the past several years.

But analysts are expecting some deceleration in both EPS and revenue growth for Q3 FY2020, at least partly due to the negative economic impacts brought on by the spread of COVID-19. Analysts estimate EPS growth to be 13.5%, the slowest pace since Q4 FY2018. Revenue growth for the quarter is expected to be 11.2%, the slowest pace since Q4 FY2017.

Microsoft Key Metrics
  Estimate for Q3 FY2020  Actual for Q3 FY2019 Actual for Q3 FY2018
Earnings Per Share ($) 1.29 1.14 0.95
Revenue ($B) 34.0 30.6 26.8
Intelligent Cloud Revenue ($B) 11.8 9.6 7.9

Source: Visible Alpha

Investors will also be interested in the performance of Microsoft's Intelligent Cloud segment, and for good reason. Research firm Gartner Inc. expects total cloud revenue across for the entire industry to exceed $260 billion in 2020. In order to capture as much of that revenue as possible, Microsoft plans to continue investing in data centers and other infrastructure to support its cloud services. But it will have to compete with other cloud platforms, like Amazon Inc.'s (AMZN) market-leading Amazon Web Services (AWS), which had a 33% share of the cloud market at the end of 2019. Microsoft's Azure ranked second, with a market share of 18%.

The company has been able to post continued revenue growth in its Intelligent Cloud segment for several years, with growth topping 25% in each of the previous two quarters. The segment represented about 31% of the company's total revenue as of the end of FY2019 compared, to just 28% at the end of FY2017.

However, analysts are currently expecting the Intelligent Cloud segment's Q3 revenue growth to slow to 22.8% YOY. That would still be 0.6 percentage points higher than the YOY growth for Q3 FY2019. It would also be twice as fast as the growth in Microsoft's total revenue for the quarter.