High-technology giant Microsoft Corporation (MSFT – Free Microsoft Stock Report) reported revenue and earnings of $23.56 billion and $0.73 a share for its fiscal third quarter (ended March 31st), excluding $1.47 billion related to Windows 10 revenue deferrals, but including $371 million in amortization related to the LinkedIn acquisition. This financial performance was generally in keeping with our revenue target of $23.60 billion, but nicely exceeded our earnings call of $0.68. Although investors initially reacted somewhat coolly to the results, it appears that they have more fully digested Microsoft's most recently quarterly financial performance, and MSFT shares are currently trading near where they left off before the release. For our part, we think that the company's March-quarter results were quite respectable. In brief review:
The Productivity and Business Process segment continued benefiting from the rapid adoption of Office 365 in both the commercial and consumer markets, with Dynamics starting to make a larger splash. Meanwhile, Linked-In contributed $975 million in revenues in the quarter, though it did weigh on the group's operating margin, given the amortization mentioned above. (Its effect was neutral, net of the amortization.) Microsoft is looking for about $1.0 billion in revenue from Linked-In in its June quarter.
Meanwhile, the Intelligent Cloud segment continued experiencing strong demand, as the secular move to cloud architecture and computing unfolds. The interest in Microsoft's Azure infrastructure platform is quite good, and the company is having success in selling high value-added services along with the workload on the platform. The investment in this arena is likely to remain a fact of life for some time yet, though we note that Microsoft reported an improvement in its margin on Azure services, suggesting that it is beginning to realize some scale in this arena.
Finally, Windows 10 continues to contribute nicely to the More Personal Computing group, with corporate adoption of the operating system remaining at a quick pace. Search revenue also advanced nicely, as did sales from Gaming reflecting the positive uptake of Xbox Live. Lastly, competition and an end-of-product cycle for the Surface products took a bite out of Devices revenue in the March quarter.
What about Microsoft stock? The company is having good success with the strategy set by CEO Satya Nadella, and we think that the momentum Microsoft is building in this regard will likely continue showing up in its future financial results. Meanwhile, high-quality MSFT shares continue to find good market support, with particular strength noted in recent trading sessions. That said, the stock's current valuation makes it somewhat less attractive as a long-term holding for those considering new commitments, in our view. If MSFT shares are already owned, though, we would 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.
