Key Takeaways

  • EPS was $2.03 vs. the $1.63 analysts expected.
  • Revenue surpassed analyst expectations.
  • Azure cloud revenue grew faster than analysts estimated.
  • Intelligent Cloud, led by Azure, drove revenue growth.

What Happened

Microsoft reported EPS for Q2 FY 2021 that beat analyst estimates. Revenue also exceeded expectations, rising at a robust pace compared to the same three-month period a year ago. Azure cloud revenue grew at a more rapid pace than forecast by analysts, up 50% compared to the year-ago quarter.

CEO Satya Nadella highlighted Microsoft's cloud platform as a key component to the digital transformation many companies are undergoing amid the COVID-19 pandemic. "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," he said.

(Below is Investopedia's original earnings preview, published January 21, 2021.)

What to Look For

Microsoft Corp. (MSFT), one of the leaders in the market for cloud services, is betting big on autonomous driving. The tech giant is one of several companies investing more than $2 billion in Cruise, a driverless-car startup owned by General Motors Co. (GM). Microsoft's goal is to provide services to the startup through its fast-growing Azure cloud platform, which is bolstering the company's sales amid the COVID-19 pandemic.

Investors will focus on how well Microsoft is continuing to weather the financial impact of the pandemic when the company reports earnings on January 26, 2021 for Q2 FY 2021. Microsoft's fiscal year (FY) ends in June. Analysts expect adjusted earnings per share (EPS) and revenue to rise, but at a significantly slower pace than in recent years.

Investors will closely watch the revenue growth for Azure, an increasingly important driver of Microsoft's overall earnings and revenue growth. Analysts forecast that Azure revenue will rise at a rapid, albeit decelerating rate.

Shares of Microsoft have outperformed the broader market over the past year. The performance gap has widened since the pandemic-induced market crash that took place between late February and late March 2020. However, that gap has slowly narrowed since last summer. Microsoft's shares have provided a total return of 36.1% over the past 12 months, more than double the S&P 500's total return of 16.0%.

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

Microsoft's stock retreated briefly after reporting earnings for Q1 FY 2021 even though both adjusted EPS and revenue beat analyst estimates. Adjusted EPS rose 31.4% as revenue grew 12.4% compared to the year-ago quarter. It was the slowest pace of revenue growth since Q4 FY 2019. The stock quickly rebounded within a week.

Investors reacted similarly to Microsofts's Q4 FY 2020 financial results, selling the stock on the news before bidding its price higher over the following week. Adjusted EPS rose 6.6%, its slowest pace in at least eight quarters. Revenue increased 12.8%, marking a deceleration from the growth posted in the prior three quarters.

Analysts expect earnings and revenue to continue growing in Q2 FY 2021, but at much slower rates compared to the past few years. Adjusted EPS is forecast to rise 7.9%, the second slowest pace in at least ten quarters. Revenue is expected to grow 8.8%, marking the slowest pace in at least ten quarters. These estimates indicate that Azure's strong growth has been unable to offset sharply slower growth in Microsoft's other key businesses.

Microsoft Key Metrics
   Estimate for Q2 FY 2021 Q2 FY 2020 Q2 FY 2019
Adjusted Earnings Per Share ($)  1.63 1.51 1.10
 Revenue ($B)  40.2 36.9 32.5
 Azure Revenue Growth (%)  41.4 62.0 76.5

Source: Visible Alpha

As mentioned above, investors also will focus on Azure revenue growth. Azure is Microsoft's cloud platform, which is comprised of over 200 products and cloud services. Cloud computing refers to the delivery of a variety of services via the Internet, including data storage, servers, databases, networking, and software. The rise in the remote-work economy amid pandemic-related lockdowns has underscored the growing importance of cloud services. One way that Microsoft and other cloud providers have been trying to increase their market share has been through partnering with small startups, providing them with the cloud platform from which to launch their own products and services. Microsoft's investment in Cruise is just one example.

Azure revenue has grown at a much more rapid pace than Microsoft's overall revenue. However, the cloud service's pace has slowed considerably over the past several years as Azure has grown from a young service with a small revenue base into a much bigger business. Revenue rose 48.0% in Q1 FY 2021. The average rate for the four quarters of FY 2020 was 56.6%. During FY 2019, the average pace of growth was 73.2%. Analysts expect Azure revenue to rise 41.4% to $6.9 billion in Q2 FY 2021, continuing the deceleration trend. Despite this trend, the growth is still impressive. If analysts are correct about their forecasts, Azure will be more than 3.5 times larger than it was nearly two years ago.