Microsoft Q4 FY2022 Earnings Report Preview: What to Look For

Microsoft Corp. (MSFT) has posted robust profit and revenue growth in recent years, including amid the global pandemic. But a strong U.S. dollar and unusually high inflation are curbing Microsoft's growth outlook. In early June, the company lowered guidance for fiscal Q4, which ended June 30. Microsoft is also fighting against antitrust complaints in Europe over competition among cloud services providers, which could rein in the company's growth even further.

Investors will be watching closely to see how Microsoft has navigated these and other challenges when the company reports earnings on July 26, 2022 for Q4 FY 2022. Microsoft's fiscal year (FY) ends on June 30. Analysts predict tepid performance by Microsoft's standards: adjusted earnings per share (EPS) and revenue are both expected to grow, but at the slowest pace in recent quarters.

Investors will also focus on YOY revenue growth in Microsoft's Azure and other cloud services. Together these represent a key component of Microsoft's cloud computing business, offering a comprehensive set of services to developers, IT professionals, and enterprises. Azure and other cloud services revenue is expected to grow substantially YOY, but also at a decelerating pace.

Microsoft shares have slightly outperformed the broader market in the past year. The stock broke away from the market in October 2021 and rallied, boosted by the company's strong Q1 FY 2022 earnings report that month. But it plateaued in November and December 2021 and began a significant descent at the end of the calendar year. Since that time, Microsoft shares have generally moved downward, advancing and declining with the broader market, though generally slightly ahead of the S&P 500. As of July 23, Microsoft stock has provided a 1-year trailing total return of -8.3%, ahead of the -9.3% return for the S&P 500 over the same period.

Microsoft Earnings History

Microsoft saw only minimal interruption due to COVID-19 to its robust adjusted EPS growth. The company reported a relatively small 6.6% YOY increase in adjusted EPS in Q4 FY 2020, coinciding with the early part of the pandemic. Otherwise, the smallest YOY growth to adjusted EPS between Q1 FY 2020 and Q2 FY 2022 was 21.9%. Growth accelerated during FY 2021, reaching 48.3% growth in Q4 of that year. However, adjusted EPS gains began to slow after that, reaching as low as 13.7% YOY in the latest reported quarter, which is Q3 FY 2022. Now, analysts expect that pace to decelerate further as Microsoft reports in increase in adjusted EPS of just 5.5% YOY in Q4 FY 2022. This would mark the smallest increase in at least four years.

Microsoft's revenue growth has been generally consistent in recent years. From Q1 FY 2020 through Q3 FY 2022, revenue grew by anywhere from 12.4% to 22.0% YOY. The past three quarters have seen a modest deceleration, from 22.0% to 20.1% to 18.4% YOY growth for Q1, Q2, and Q3 FY 2022, respectively. Analysts expect that slowdown will continue in Q4 as revenue rises an estimated 13.3% for the quarter.

^{Source: Visible Alpha}

The Key Metric

As mentioned above, investors will also focus on revenue growth in Azure and other cloud services. 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. As of the end of the fourth quarter of 2021, Azure had a share of roughly 22% of the global cloud market, ranking it second behind Amazon.com Inc.'s (AMZN) Amazon Web Services. The cloud computing market is growing quickly, and Azure is growing at a faster pace than Microsoft as a whole. However, Microsoft still has to compete with Amazon, Alphabet Inc.'s (GOOGL) Google Cloud, and a variety of smaller rivals. This is especially important as work-from-home and hybrid work arrangements begun during the pandemic may have staying power, which could boost the market for cloud services.

Microsoft's Azure and other cloud services business has grown at a substantial pace, more than tripling quarterly revenue in just three years. As revenue has increased, the pace of growth has slowed. In Q4 FY 2019, for example, Azure and cloud revenue grew by 63.0% YOY. Although sales have remained strong, they have failed to reach that same growth rate in the subsequent 11 reported quarters. Growth has significantly slowed in recent quarters, from 51.2% in Q4 FY 2021 to 44.7% in Q3 FY 2022. Now, analysts expect growth to further slow to 43.1% in Q4 FY 2022.