Microsoft Q1 FY2022 Earnings Report Preview: What to Look For

Microsoft Corp. (MSFT) is coming off one of its best fiscal years in recent history, posting the fastest earnings and revenue growth rates in the past five years. That has enabled the company to pass on more of its profits to shareholders. Microsoft announced in mid-September that it was increasing its quarterly dividend by 11% and was beginning a new $60 billion stock buyback program.

Investors will be watching to see if Microsoft can maintain its strong financial performance when the company reports earnings on Oct. 26, 2021 for Q1 FY 2022. Microsoft's fiscal year (FY) ended in June. Analysts expect adjusted earnings per share (EPS) to rise, but at a slower pace than the most recent four quarters. Revenue also is expected to increase, but at a slower pace than the latest reported quarter.

Investors will also be focused on year-over-year (YOY) revenue growth for Azure, which is a key component of Microsoft's cloud computing business that offers a comprehensive set of services to developers, IT professionals, and enterprises. Analysts expect Azure revenue to grow YOY at a slightly faster pace than in the previous quarter.

Microsoft's rapid growth comes amid an expanding threat. Russia-linked hackers have boosted their attacks in recent months, breaking into technology companies in an effort to steal sensitive information, cybersecurity experts at Microsoft and other companies say. Microsoft itself and the cybersecurity company FireEye were compromised during a previous major incident.

Shares of Microsoft have outperformed the broader market over the past year. The stock mostly lagged the market in late 2020 and then pulled out ahead in mid-June of this year. Its outperformance gap has gradually widened since. Microsoft's shares have provided a total return of 45.2% over the past year, above the S&P 500's total return of 31.6%.

Microsoft Earnings History

Microsoft reported Q4 FY 2021 earnings and revenue that beat analysts expectations. Adjusted EPS rose 48.3% compared to the year-ago quarter. Revenue grew 21.4% YOY. Both adjusted EPS and revenue grew at their fastest pace out of any quarter in at least the past four and a half years. Microsoft's Intelligent Cloud unit led all other segments in revenue growth for the quarter.

In Q3 FY 2021, the company's earnings and revenue surpassed analyst consensus estimates. Adjusted EPS increased 39.4% compared to the year-ago quarter, continuing an acceleration trend that began in the first quarter of FY 2021. Revenue expanded 19.1% YOY, accelerating from the prior quarter. The company noted that digital adoption was continuing to accelerate amid the ongoing COVID-19 pandemic as increasing numbers of businesses moved their operations to the cloud.

Analysts expect earnings and revenue growth to decelerate in Q1 FY 2022. Adjusted EPS is forecast to rise 14.1% YOY, which would be the slowest pace since the final quarter of FY 2020. Revenue is expected to grow 18.2% YOY. For full-year FY 2022, analysts are currently forecasting adjusted EPS to increase 10.0%, which would be the slowest pace in at least the past six years. Annual revenue is expected to expand 14.1%, slowing from last year's pace of 17.5%.

^{Source: Visible Alpha}

The Key Metric

As mentioned above, investors will also focus on revenue growth in Azure, which forms, along with services like SQL server and Visual Studio, a part of Microsoft's Intelligent Cloud segment. Azure is a cloud platform that offers developers, IT professionals, and enterprises a suite of tools and services that can be used for networking, storage, mobile and web application services, AI, Internet of Things (IoT), and a range of other computing needs. It captured an approximately 22% share of the global cloud market as of the end of the second quarter of the 2021 calendar year. Microsoft's Azure is second only to Amazon.com Inc.'s (AMZN) Amazon Web Services in terms of global cloud market share.

Azure has become an important driver of growth at Microsoft in recent years, outpacing the company's overall revenue growth. Despite that superior performance, the pace of growth has slowed sharply in recent years. Azure revenue rose 76.0% YOY in the first quarter of FY 2019 and then decelerated to a pace of 68.0% YOY by the final quarter of that year. (Note that the growth rates above are estimates from Visible Alpha since Microsoft did not report Azure revenue growth prior to FY 2020.)

In the first quarter of FY 2020, Azure revenue grew 63.0% YOY and the pace again decelerated to 50.0% YOY by the final quarter of the year. The deceleration trend continued with growth slowing to 45.0% by the final quarter of FY 2021. Analysts expect growth to accelerate slightly to a pace of 45.4% YOY in Q1 FY 2022. (Note that the revenue growth rates for Azure above are in constant currency, which is how Microsoft discloses them.)