Microsoft (MSFT) Beats Earnings Estimates Handily

Microsoft Corporation (MSFT) posted strong results for the quarter that ended on Dec. 31, 2020, which is the second quarter of the company's fiscal year 2021, beating analysts' estimates handily as well as representing large year-over-year gains. Earnings per share (EPS) were $2.03, 23.8% better than the consensus estimate of $1.64 and 34.4% greater than the figure of $1.51 earned in the same period a year earlier.

Total revenue was $43.08 billion, beating the consensus estimate of $40.18 billion by 7.2% and representing an increase of 16.7% over the figure of $36.91 billion booked in the same period a year ago.

Areas of Strength

In its earnings release, Microsoft cited several areas of particular strength that represented major revenue improvements from the same period in the prior year. These included:

• Office Commercial products and cloud services revenue rose 11%, driven by Office 365 Commercial revenue growth of 21%.
• Office Consumer products and cloud services revenue rose 7%, and Microsoft 365 Consumer subscribers increased to 47.5 million.
• LinkedIn revenue increased by 23%.
• Dynamics products and cloud services revenue increased 21%, driven by Dynamics 365 revenue growth of 39%.
• Server products and cloud services revenue increased 26%, driven by Azure revenue growth of 50%.
• Xbox content and services revenue increased 40%.

Commenting on the results, Microsoft CEO Satya Nadella stated: "What we have witnessed over the past year is the dawn of a second wave of digital transformation sweeping every company and every industry. Building their own digital capability is the new currency driving every organization's resilience and growth. Microsoft is powering this shift with the world's largest and most comprehensive cloud platform."

Increased Returns of Capital to Shareholders

Microsoft returned $10 billion to shareholders through share repurchases and dividends in the second quarter of fiscal year 2021, representing an increase of 18% from the same period in the prior year.

Significance for Investors

While CEO Nadella attributes Microsoft's strong results to a "digital transformation" and his company's positioning as a leading provider of cloud services, he did not address why the demand for cloud services is growing so rapidly. One reasonable answer is the explosive growth of work-from-home and entertain-yourself-at-home arrangements in response to COVID-19.

However, it is unclear how long, if it all, similar growth rates are sustainable into the future. It is highly likely that 2020 represented a quantum leap in the underlying drivers, to a degree that may not be replicable in 2021.