Microsoft Delivers Flawless Third Quarter

Wide moat-rated

Management also continues to execute on its LinkedIn integration, as the business is seeing accelerating revenue growth and improving profitability. CFO Amy Hood provided strong fourth-quarter guidance and offered an initial outlook for fiscal 2019 that signaled continued strength across Microsoft’s most important products, including double-digit growth in Productivity and Business Processes and consistent gross margin expansion in the firm’s cloud businesses.

After accounting for this outlook and baking in greater Office 365 and LinkedIn revenue growth long term, we are lifting our fair value estimate to $117 per share from $106 previously, and we continue to view the shares as attractive.

Third-quarter revenue rose 16% versus the prior-year period to $26.8 billion as the firm lapped a full quarterly contribution from LinkedIn for the first time. Not only is Microsoft generating elevated, sustained top-line growth, but we are beginning to see scale efficiencies enter its cloud businesses, yielding uplift in profitability. Commercial cloud gross margins (which includes Azure, Office 365, Dynamics 365, and Enterprise Mobility Suite) expanded 600 basis points year-over-year and 200 basis points sequentially to 57%, while consolidated operating margins expanded nearly 200 basis points to 30.9%. Management anticipates the firm will continue to see Commercial Cloud gross margin gains continue in fiscal 2019, and we forecast gross margins expanding roughly 50 basis points to 65%.

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