Microsoft Calms Fears in Q2 Earnings With a Positive Outlook

Microsoft (MSFT) reported headline fiscal fourth-quarter revenue and EPS results just below the low end of the lowered guidance range from June 2. However, we believe that Microsoft’s fundamentals remain sound, as the company’s performance was hurt mainly by things beyond its control, such as a stronger U.S. dollar, persistent supply chain issues, further scaling back in Russia, and general macroeconomic pressures. We are encouraged by several pockets of strength, such as Azure, the continued migration to Office E5, and traction with the Power platform. We consider guidance to be quite good in the face of investors’ intense fear. We see results as reinforcing our thesis centering on the proliferation of hybrid cloud environments and Azure, as the firm continues to use its on-premises dominance to allow clients to move to the cloud at their own pace. We also think Microsoft’s strong pipeline of large deals bode well for the broader software industry overall. We are maintaining our $352 per share fair value estimate for wide-moat Microsoft and view shares as attractive.

For the June quarter, revenue grew 12% year over year as reported to $51.87 billion, compared with the low end of guidance of $51.94 billion and FactSet consensus at $52.39 billion. Results include headwinds from incrementally worse currency of $595 million, $300 million in supply chain issues in China and an eroding PC market, and $100 million in lower Bing and LinkedIn advertising revenue. Compared to the year-ago period, Productivity and Business Processes grew 13%, Intelligent Cloud grew 20%, and More Personal Computing grew 2%. While we expected decelerating revenues, results are slightly light across all segments, which is overwhelmingly explained by currency that continued to worsen throughout June. Key pillars of our growth narrative from the quarter included year-over-year growth as reported in Azure of 40%, Dynamics 365 of 31%, and LinkedIn of 26%.