Key Takeaways

  • Analysts estimate adjusted EPS of $1.78 vs. $1.40 in Q3 FY 2020.
  • YOY growth in Azure revenue is expected to slow compared to the year-ago quarter.
  • Companywide revenue growth is expected to accelerate compared to a year earlier as Microsoft's cloud business expands.

Microsoft Corp. (MSFT) recently announced its biggest acquisition since LinkedIn in 2016, agreeing to buy speech technology company Nuance Communications Inc. (NUAN) for $19.7 billion. Nuance's specialty in providing conversational AI and cloud-based clinical intelligence to healthcare providers will advance Microsoft's strategy to meet cloud-computing needs in the healthcare industry. The deal is expected to close sometime in 2020.

While the Nuance deal is expected to fuel Microsoft's longterm growth, investors are likely to focus on Microsoft's immediate results when they are released on April 27, 2021 for Q3 FY 2021. Microsoft's fiscal year ends June 30. Investors may find plenty of reasons to be pleased. Analysts expect adjusted earnings per share (EPS) to rise at a robust pace and revenue to rise at its fastest pace in the past 10 quarters.

Investors will also be focused on year-over-year (YOY) revenue growth for Azure, 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 at a robust, albeit slower pace, compared to the year-ago quarter.

Shares of Microsoft have alternated between outperformance and underperformance over the past year. After about five weeks of lagging the market between the end of February and early April, the stock has begun to outperform again. Microsoft's shares have provided a total return of 53.9% over the past year, above the S&P 500's total return of 49.4%.

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

Microsoft Earnings History

The stock continued to trend upward after Microsoft reported financial results for Q2 FY 2021, which ended Dec. 31, 2020. Adjusted EPS rose 34.1%, marking the fastest pace of growth since the second quarter of FY 2020. Revenue for the quarter rose 16.7%, the fastest pace since Q1 FY 2019. Microsoft highlighted the digital transformation that was taking place over the past year and that demand was accelerating for its cloud platform.

In Q1 FY 2021, growth in adjusted EPS accelerated to a pace of 31.2% after posting an abnormally slow 6.6% pace of growth in the final quarter of FY 2020. Quarterly revenue expanded 12.4%, marking the slowest rise since Q4 FY 2019. Microsoft said that demand for its cloud offerings drove results for the quarter.

Analysts expect earnings and revenue to continue growing at a robust pace in Q3 FY 2021. Adjusted EPS is forecast to climb 27.1%. Revenue is expected to rise 17.3%, which would be the fastest pace since the first quarter of FY 2019. For full-year FY 2021, adjusted EPS is expected to grow 28.4% while annual revenue rises 14.8%. It would be the fastest pace of growth for either metric in at least six years.

Microsoft Key Stats
Estimate for Q3 2021 (FY) Q3 2020 (FY) Q3 2019 (FY)
Adjusted Earnings Per Share ($) 1.78 1.40 1.14
Revenue ($B) 41.1 35.0 30.6
YOY Growth in Azure Revenue (%) 46.3 58.2 75.1

Source: Visible Alpha

The Key Metric

As mentioned above, investors will also be focused 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 20% share of the global cloud market as of the end of the 2020 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 increasingly important source of revenue for Microsoft in recent years and has been outpacing revenue growth for the company as a whole. However, that growth has been trending lower. In FY 2016, Azure's annual revenue grew at a pace of 115.4%. It has decelerated in every year since, slowing to a pace of 56.0% in FY 2020. The deceleration trend has continued into FY 2021, with Azure revenue growing 48.0% YOY in the first quarter and accelerating slightly to 50.0% YOY in the second. Analysts expect revenue for Microsoft's cloud platform to rise 46.3% YOY in Q3 FY 2021 to $7.7 billion. That would be the slowest pace of growth in at least 16 quarters. For full-year FY 2021, analysts are currently forecasting annual Azure revenue to rise 46.5% to $29.8 billion. It would be the slowest pace in at least six years.