High-technology giant and Dow-30 component Microsoft Corporation (MSFT – Free Microsoft Stock Report) reported revenue and earnings for its fiscal fourth quarter (years end June 30th) of $24.7 billion and $0.75 a share, respectively. (Note: These figures are adjusted for Windows 10 revenue deferrals, impairment and restructuring expenses, and a tax benefit from prior losses related to the company's phone business.) This performance exceeded our respective estimates of $24.1 billion and $0.70 a share. When these results are combined with those from the first three quarters, Microsoft posted revenue of $96.7 billion and earnings of $3.08 a share for fiscal 2017, versus last year's tallies of $92.0 billion and $2.79, respectively.
As has been the case for the last 12 to 18 months, Microsoft continued experiencing strong demand for its cloud infrastructure and related platform services, as well as from cloud-based productivity offerings Office 365 and Dynamics 365. Windows 10 and its related ecosystem also performed reasonably well, particularly in the commercial markets. Elsewhere, Gaming appears to be shaping up nicely, with good prospects for the holiday season.
On balance, investors seem largely to have taken the latest earnings report in stride, as MSFT shares have dipped only slightly in early trading, along with the market in general. We note that MSFT stock has been a strong performer so far this year, so a period of consolidation may be in order. Meanwhile, the company will continue making the required investments to meet its customers' demand in the cloud arena. Accordingly, revenues from its offerings for cloud infrastructure services and cloud-based productivity services should remain in a rapid growth mode in fiscal 2018. Although Microsoft is benefiting from the scale of its cloud buildout, with gross margins in its cloud businesses improving each quarter, the company's overall profit margins may not widen this year, reflecting the drag from the amortization related to the LinkedIn acquisition. That said, Microsoft is demonstrating that it is a very effective competitor in the cloud arena, and will likely continue improving on its position in the coming years, as the secular move to cloud architecture unfolds. All things considered, if MSFT shares are already owned, we advise Value Line subscribers to continue to hold them.
About The Company: Microsoft Corp. is the largest independent maker of software. It develops and sells products for a wide range of computing devices. The company also sells the Xbox video game console. Revenue sources in fiscal 2016 were as follows: Productivity & Business, 28.8%; Intelligent Cloud, 27.2%; Personal Computing, 44.0%. Research & development spending as a percent of 2016 sales was 13.0%.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
