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Microsoft Shares Gain After Q2 Earnings Beat, Solid Cloud And Gaming Outlook

Microsoft generated $8.3 billion in free-cash flow over its fiscal second quarter, a notable highlight in a Street-beating earnings report that included $43 billion in overall revenues and a 50% surge in Azure sales.

Microsoft Corp.  (MSFT) - Get Microsoft Corporation Report shares jumped higher in pre-market trading Wednesday after the tech giant blew through Wall Street earnings forecasts and said cloud revenues would continue to drive growth in the months ahead. 

Azure, Microsoft's benchmark cloud offering, recorded a 50% increase in revenues over the group's second quarter, which ended in December, helping push the topline for its Intelligent Cloud division 23% higher to $14.6 billion. Those gains, alongside stronger-than-expected revenues in Personal Computing, which rose 14% to $15.1 billion, lifted overall second quarter revenues to $43.1 billion, producing a Street-beating bottom line of $2.03 per share.

 Looking into the current quarter, Microsoft said it sees Intelligent Cloud revenues of between $14.7 billion and $14.95 billion, with Personal Computing sales in the range of $12.3 billion to $12.7 billion. Productivity and Business Process revenues were forecast at $13.35 billion to $13.6 billion.

"I think one of the things that we're seeing is the COVID impact has put a lot of constraints on all our customers, but the one structural change is the digital technology is becoming critical even for core resilience and business continuity and to deal with what is going to be a structurally changed customer behavior and expectations," CEO Satya Nadella told investors on a conference call late Tuesday. 

"So as a tech company with that comprehensive differentiated portfolio, all the way from business applications, industry solutions to infrastructure, I think we benefit from that and that's what you saw this quarter," he added.

"But more importantly for me, when I look at the next 10 years of what compute and digital technology will do across industries, that's the opportunity that we are obviously staying very, very focused on and investing in," Nadella said.

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Microsoft shares were marked 3.3% higher in early trading Wednesday to change hands at $240.00 each, a move that would extend the stock's six-month gain to around 17%.

Stay-at-home work dynamics certainly boosted the group's Personal Computing division, but also had a significant impact on gaming, where revenues rose past $5 billion for the first time thanks in part to the launch of Xbox Series X and Series S

"Xbox Live has more than 100 million monthly active users while Game Pass now has 18 million subscribers," Nadella said. "And we are transforming how games are distributed, played and viewed, bringing cloud gaming and Game Pass to iOS devices and Windows PCs over the next few months."

The revenue gains across the board were also highlighted in the group's free cash flow, which surged 33% from last year to $8.3 billion, once the impact of a tax settlement was stripped away. Microsoft's gross margins also improved, rising 50 basis points to 67%

"We think Microsoft, from a stock perspective, is a solid compromise between growth and value software," said BMO Capital Markets analyst Keith Bachman, who lifted his price target on the stock by $25 to $270 per share. 

"In other words, we think Microsoft has both good offensive and defensive capabilities from a stock perspective, including if there is a migration away from aggressive growth software to more moderate growth software due to valuations,' Bachman added.