Image: Microsoft remains one of the most attractive technology companies. Its outlook for the second quarter of fiscal 2022 came in better than expected. Image Source: Microsoft
By Brian Nelson, CFA
Microsoft Corp. (MSFT) reported excellent first-quarter fiscal 2022 results on Tuesday, October 26, that exceeded the consensus estimate on both the top and bottom lines. In the quarter, Microsoft’s revenue jumped an impressive 22% on a year-over-year basis, and the company was able to leverage that strong top-line growth into a year-over-year operating-income advance of 27%. Diluted earnings per share on a GAAP and non-GAAP basis increased 49% and 25%, respectively, from the same quarter a year ago – these are absolutely huge growth numbers for a company as large as Microsoft!
Here is what CFO Amy Hood had to say about the quarter on the conference call (lightly edited):
Our sales teams and partners delivered a strong start to the fiscal year, and our commercial business, customers continue to choose the Microsoft Cloud. We again saw healthy growth in our Azure consumption-based business, and increased usage across products, such as Teams and Power Platform…
…In our on-premises business, performance in Office to Server benefited from a greater-than-expected mix of contracts, with higher in-period revenue recognition, and in LinkedIn, the Talent Solutions business continued to benefit from an improved job market. In our consumer business, Windows OEM performance was better than expected in a growing PC market, despite ongoing supply chain constraints. We also saw positive demand signals for Windows 11 ahead of launch with nearly all devices built this quarter eligible for upgrade. Microsoft 365 subscription growth drove Office Consumer results, advertising market growth drove another strong quarter in LinkedIn…. as well as searching News advertising…
…And in gaming, we were able to ship more Xbox series X and S consoles than expected, even as demand continues to exceed supply. Let’s move to our overall results. Against the strong prior-year comparable commercial bookings grew 11% and 14% in constant currency driven by consistent execution across new, add-on, and renewal sales motions.
By the numbers, Microsoft is a standout. The company generated $18.73 billion in non-GAAP free cash flow during the first quarter of fiscal 2022, up an incredible 30% on a year-over-year basis. Total cash and short-term investments stood at $130.6 billion against a total short- and long-term debt load of ~$53 billion, resulting in a very attractive net cash position through which Microsoft can return cash to shareholders. During the fiscal first quarter, it returned $10.9 billion in the form of share buybacks and dividends. Microsoft’s momentum has continued into the fiscal second quarter, too, with the company guiding revenue above consensus forecasts on the call.
Concluding Thoughts
Microsoft has long been a favorite of ours. The technology giant continued its dominance into the first quarter of its fiscal 2022 (ends September) and guided the current calendar quarter revenue above consensus forecasts. Its free cash flow generation remains top notch, and its balance sheet is flush with net cash. Microsoft remains an idea in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio. Shares have a dividend yield of ~0.8% at the time of this writing. The high end of our fair value estimate range of Microsoft stands at $360 per share.
Microsoft’s 16-page Stock Report (pdf) >>
Microsoft’s Dividend Report (pdf) >>
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.