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Microsoft Stock Is Still A Good Long Term Buy Following Latest Earnings

  • Microsoft has posted mixed FQ3 results with in-line revenue but lower-than-expected earnings.
  • Microsoft's cloud is growing slower than expectations while its hardware division is ailing due to weak console and phone sales.
  • The two segments could, however, improve in the coming quarters.

Microsoft (NASDAQ:MSFT) has posted mixed FQ3 results and issued a weak FQ4 guidance during its latest earnings call. Microsoft reported non-GAAP revenue of $22.1B, up 1.7% Y/Y and in-line with the Wall Street consensus but non-GAAP EPS of $0.62 came in $0.02 below analysts' estimates.

Net profit for the quarter dropped 25% Y/Y to $3.76B. Microsoft blamed a higher-than-expected tax expense due to a changing geographic mix for the earnings shortfall. Microsoft had guided for non-GAAP tax rate of 20% but actual tax rate for the quarter was 24% resulting in a $0.04 EPS hit. This implies that Microsoft's earnings would have topped estimates had tax rates remained within the predicted range.

Also read: Microsoft Willing To Lend A Helping Hand In Yahoo Sale

On a GAAP basis, Microsoft's revenue came in at $20.5B, down 5.5% compared to a year ago. Microsoft blamed the lackluster non-GAAP revenue on the multiyear PC market slump and currency headwinds.

Segment Performance

Microsoft's segment performance was mixed with the pivotal cloud posting slower-than-expected growth while its PC division performed better than the market. Meanwhile, Microsoft announced that commercial cloud annualized revenue run rate had exceeded $10B, up from $9.4B in the previous quarter.

  1. Intelligent Cloud (server products, Azure, and enterprise mobility)--revenue was up 3% (up 8% in constant currency) to $6.1B. The segment's operating profit plummeted 14% to $2.2B.

Server products and cloud service revenue grew 5% in constant currency. Azure revenue was up 120% Y/Y in constant currency while enterprise mobility customers more than doubled to 27k.

  1. More Personal Computing (Windows, hardware, and Bing)--revenue grew just 1% (up 3% in constant currency) to $9.5B. The segment's operating profit, however, performed much better after increasing 57% to $1.65B.

Windows OEM revenue outperformed the market after declining 2% in constant currency with Microsoft attributing this to a favorable consumer product mix (consumers buying more high-end Windows products). Surface revenue was up 61% in...