Software and cloud infrastructure and application services giant Microsoft (MSFT –Free Microsoft Stock Report) reported revenue and earnings for its fiscal second quarter of $28.9 billion and $0.96 a share, excluding a charge of $13.8 billion related to the Tax Cuts and Jobs Act. (Fiscal years end June 30th.) This financial performance compared favorably with our estimates made in early November of $28.2 billion and $0.84 a share. Despite the good financial results, it appears that most investors had already factored in the results, with MSFT shares pretty much tracking with the market in early trading.
From an operating standpoint, the established trends continued benefiting the company, with revenue growth from Office 365 and Dynamics 365 once again being a bright spot for the Productivity and Business Processes segment. In terms of revenue, LinkedIn also remained a positive factor, though it continued to be a drag on segment operating profit (inclusive of acquisition-related amortization). Meanwhile, the Intelligent Cloud segment continued progressing rapidly, with server products and cloud services revenue moving forward at a strong double-digit clip; cloud platform Azure remained on a steep upward trajectory (up 98%). News from the More Personal Computing segment showed that interest in Windows 10 stayed active, reflecting growth in the OEM market. In addition, Microsoft had a good holiday season in gaming, and search revenue (excluding acquisition costs) advanced nicely.
As it stands now, we look for Microsoft's operations to remain on an upward swing, as it continues to make a rapid advance in the cloud arena. Indeed, it appears that the company is benefiting from scale economies in the cloud (enhancing profitability), though further investments will be required to meet the burgeoning demand. From a bottom-line perspective, Microsoft will benefit from the new tax law, with the company estimating an 18% blended rate for this fiscal year, versus the 22% targeted before the law passed. Taking the good operating performance recorded so far and the lower tax rate into account, we are now looking for earnings to reach $3.60 a share this year, up $0.35 from our November review. On the other hand, MSFT shares' current valuation seems to factor in a good portion of the prospects we see over both the near- and longer-term, making new commitments to this high-quality stock less enticing. Nonetheless, if the shares are already owned, we would continue to hold on to them, for now.
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%.
— Charles Clark
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
