Microsoft Revenue Up 12% and Net Income Up 30% in FY21 Q1

Company beat expectations but stock dropped based on Q2 outlook

In Microsoft’s first quarter of fiscal year 2021, the tech giant reported total revenue of $37.2 billion, a 12% increase year-over-year, and operating income of $15.9 billion, a 25% increase year-over-year. For the quarter ended September 30, 2020, Microsoft also reported net income of $13.9 billion, a 30% increase year-over-year, and diluted earnings per share of $1.82, a 32% increase year-over-year.

“We are off to a strong start in fiscal 2021, driven by the continued strength of our commercial cloud, which surpassed $15 billion in revenue, up 31% year over year. The next decade of economic performance for every business will be defined by the speed of their digital transformation. We are innovating across the full modern tech stack to help customers in every industry improve time to value, increase agility and reduce costs,” said Microsoft CEO Satya Nadella on the October 27 earnings call.

First Quarter Fiscal Year 2021 Highlights

The company reported the following highlights for its first quarter of fiscal year 2021:

  • Revenue in Productivity and Processes was $12.3 billion, an 11% increase year-over-year.
  • Office Commercial products and cloud services revenue increased 9%, led by Office 365 Commercial revenue growth of 21%.
  • Office Consumer products and cloud services grew 13%. Microsoft 365 Consumer now has 45.3 million subscribers, compared to 42.7 million at the end of June.
  • LinkedIn revenue grew 16%, “significantly ahead of expectations.” (Microsoft acquired LinkedIn in 2016.)
  • Dynamics products and cloud services revenue increased 19%, led by Dynamics 365 revenue growth of 38%.
  • Revenue in Intelligent Cloud was $13.0 billion, a 20% increase year-over-year. This includes revenue from server products and cloud services, which was up 22% year-over-year.
  • Revenue in More Personal Computing was $11.8 billion, a 6% increase year-over-year.
  • Windows OEM revenue dropped 5% year-over-year, but Windows Commercial products and cloud services revenue grew 13%.
  • Xbox content and services revenue increased 30% year-over-year.
  • Surface revenue increased 37% year-over-year, and search advertising revenue, excluding traffic acquisition costs, decreased 10% year-over-year.
  • Microsoft returned $9.5 billion to shareholders through share repurchases and dividends during the quarter, a 21% increase compared to the same period last year.

Azure clients and partners

In its Azure product line, Nadella said that Microsoft is working with SpaceX, PepsiCo, Electrolux, GE Aviation, Airbus, Volkswagen, AT&T, Telstra, Lockheed Martin, PayPal, IKEA, Toyota, Chipotle and Verizon. He also said Microsoft 365 users generated more than 30 billion collaboration minutes in a single day during the quarter through Teams which allows remote workers to meet, call, chat, and collaborate on content and workflow. Nearly 270,000 institutions are using Teams for remote learning.

Game Pass growth

Gaming which has been lagging in recent years is more popular than ever. In fact, according to Microsoft, 3 billion consumers use gaming for entertainment as well as community. The company’s Xbox Game Pass subscription service now has more than 15 million subscribers. In the previous quarter, gaming revenue saw an increase of 64% which included a 49% increase in Xbox hardware, mostly from Xbox console sales.

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The new Xbox series X gaming console is available as a standalone device for $499.99 or with a 24-month Xbox Game Pass Ultimate subscription for $34.99 a month.
The new Xbox series X gaming console is available as a standalone device for $499.99 or with a 24-month Xbox Game Pass Ultimate subscription for $34.99 a month. Image courtesy of Microsoft.

Q2 FY2021 Outlook

Chief financial officer Amy Hood provided the following guidance for the second quarter of fiscal year 2021:

  • Productivity and Business Processes revenue between $12.75 billion and $13 billion
  • Intelligent Cloud revenue between $13.55 billion and $13.8 billion
  • More Personal Computing revenue between $13.2 billion and $13.6 billion
  • Surface revenue will remain flat.
  • Cost of goods sold will range between $13.75 billion to $13.95 billion.
  • Operating expenses are estimated to be between $11.4 billion to $11.5 billion.

“As digital transformation accelerates and our sales teams and partners continue to execute well in serving customers, our high-value solutions should drive full year double-digit revenue growth in our commercial segments even in a challenging and competitive environment. Given our significant ambition, desire to enable our customers’ visions for their future and the opportunity that creates, we will continue to invest in high-growth markets and the strategic areas that will further enhance our position,” said Hood on the earnings call.

Insider Take

Microsoft exceeded earnings and sales expectations, said MarketWatch, but stock dropped after the earnings report because the company’s forecast for cloud services and gaming are lower than expected. After the earnings report, Microsoft stock was valued at $213.25. As of 10:52 a.m. EDT yesterday, it had dropped to $204.63. This is partly due to Microsoft’s forecast, but the economic forecast has been unpredictable at best during the pandemic. Quarterly revenue by business segment is estimated to be higher in all three categories (Productivity and Business Processes, Intelligent Cloud and More Personal Computing).

Source: Google