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What Investors Missed in Microsoft’s Latest Call With Analysts

While some growth stocks have disappointed investors so far in this earnings season, Microsoft (NASDAQ: MSFT) hasn’t. The software giant recently announced head-turning growth, especially in its cloud services division as enterprises continued to spend aggressively on their digital transformations.
Investors loved what they saw in Microsoft’s earnings update, which showed that earnings shot higher by nearly 20% to $17 billion in the first quarter. But management had some even better news in their conference call with Wall Street analysts. Let’s look at a few highlights from that presentation.
Image source: Getty Images.

Winning cloud market share
Microsoft’s Azure platform isn’t nearly as dominant as Amazon’s cloud services, but it is gaining market share in that critical segment. Azure growth was the main factor in Microsoft’s 32% sales spike in its cloud division.
Management is seeing no slowdown in demand from enterprises wanting to transition more business to the cloud, and the Azure platform is increasingly winning huge contracts in the space. “We are seeing larger, more strategic Azure commitments from industry leaders,” CEO Satya Nadella said in the call, “including Boeing, Kraft Heinz, US Bank, and Westpac, who all chose our cloud to accelerate their digital transformations.” Microsoft doubled the number of large deals it closed from the prior year.
Gaining in the PC business
Microsoft’s consumer computing is just as healthy with demand rising for PCs and productivity software like its Office platform. The industry seems primed for solid growth ahead, too, as people spend more time on computers for work, communication, and play.
“The number of use cases is increasing as is the amount of time spent on PCs,” Nadella said. “More than 100 million PCs have shipped in each of the last eight quarters, and Windows continues to take share.”
Looking toward 2023
Management issued a detailed 2022 outlook in the call that includes a few new headwinds such as supply-chain delays from COVID-19 shutdowns in China and the war in Ukraine. Sales growth trends in the second quarter should moderate in both the cloud and consumer segments while remaining high even compared to soaring results a year ago.
The gaming segment will be the only declining niche with Xbox revenue likely falling due to the combination of lower engagement compared to last year and supply-chain shortages for gaming consoles.
Management warned that the cloud business might see more volatile results thanks to the timing of large contract bookings and renewals. These factors could add uncertainty around short-term sales and earnings trends.
Yet Microsoft is planning to deliver steady growth results for investors, which should support continued positive returns for shareholders through a turbulent market. “We expect to close [fiscal 2022], even in a more complex macro environment, with the same consistency we have delivered through the year, with strong revenue growth, share gains, and improved operating margins,” CFO Amy Hood said.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Demitri Kalogeropoulos has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy. –

While some growth stocks have disappointed investors so far in this earnings season, Microsoft (NASDAQ: MSFT) hasn’t. The software giant recently announced head-turning growth, especially in its cloud services division as enterprises continued to spend aggressively on their digital transformations.

Investors loved what they saw in Microsoft’s earnings update, which showed that earnings shot higher by nearly 20% to $17 billion in the first quarter. But management had some even better news in their conference call with Wall Street analysts. Let’s look at a few highlights from that presentation.

Image source: Getty Images.

Winning cloud market share

Microsoft’s Azure platform isn’t nearly as dominant as Amazon‘s cloud services, but it is gaining market share in that critical segment. Azure growth was the main factor in Microsoft’s 32% sales spike in its cloud division.

Management is seeing no slowdown in demand from enterprises wanting to transition more business to the cloud, and the Azure platform is increasingly winning huge contracts in the space. “We are seeing larger, more strategic Azure commitments from industry leaders,” CEO Satya Nadella said in the call, “including Boeing, Kraft Heinz, US Bank, and Westpac, who all chose our cloud to accelerate their digital transformations.” Microsoft doubled the number of large deals it closed from the prior year.

Gaining in the PC business

Microsoft’s consumer computing is just as healthy with demand rising for PCs and productivity software like its Office platform. The industry seems primed for solid growth ahead, too, as people spend more time on computers for work, communication, and play.

“The number of use cases is increasing as is the amount of time spent on PCs,” Nadella said. “More than 100 million PCs have shipped in each of the last eight quarters, and Windows continues to take share.”

Looking toward 2023

Management issued a detailed 2022 outlook in the call that includes a few new headwinds such as supply-chain delays from COVID-19 shutdowns in China and the war in Ukraine. Sales growth trends in the second quarter should moderate in both the cloud and consumer segments while remaining high even compared to soaring results a year ago.

The gaming segment will be the only declining niche with Xbox revenue likely falling due to the combination of lower engagement compared to last year and supply-chain shortages for gaming consoles.

Management warned that the cloud business might see more volatile results thanks to the timing of large contract bookings and renewals. These factors could add uncertainty around short-term sales and earnings trends.

Yet Microsoft is planning to deliver steady growth results for investors, which should support continued positive returns for shareholders through a turbulent market. “We expect to close [fiscal 2022], even in a more complex macro environment, with the same consistency we have delivered through the year, with strong revenue growth, share gains, and improved operating margins,” CFO Amy Hood said.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Demitri Kalogeropoulos has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.

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