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Microsoft (NASDAQ:MSFT) has delivered another set of outlook-busting results for the quarter ending June 30, 2021, largely thanks to the usual suspects, including the Azure cloud division and business products including Office 365, Dynamics 365, and LinkedIn. Unfortunately, the company’s Xbox division, which had been cruising along nicely for several quarters thanks to the growth of Xbox Game Pass and the launch of the Xbox Series X and S consoles, suffered a year-on-year decline in revenue in Q4.
Microsoft scooped up revenue of $46.2 billion and net income of $19.1 billion during Q4 2021, a respectable 21 percent year on year increase for revenue and a whopping 42 percent increase for income. Earnings per share were $2.17, which is above the $1.92 per share analysts were expecting and 49 percent up compared to the same period the previous year. For the full 2021 fiscal year, revenue was $168 billion and income was $69.9 billion, up 18 percent and 32 percent respectively. Microsoft stock dropped 2 to 3 percent in after-hours trading, then rebounded sharply following the company's earnings call.
The Cloud Picks Up New Steam
As usual, there’s no overlooking the Q4 effects of business productivity services like Office 365, Dynamics 365, and Teams, and the Intelligent Cloud division. Azure adoption drove Intelligent Cloud revenue to $17.4 billion, a year-on-year increase of 30 percent, which is better than the 23 percent increase in Q3. This heating up of the cloud division was driven by a wide range of new corporate and public sector partnerships, ranging from major banks like Morgan Stanley to the US Army. Naturally, products that help teams working from home are still a goldmine given the state of the world, with Dynamics products being up 33 percent, driving the Productivity and Business Processes division revenue to $14.7 billion, up 27 percent compared to Q4 2020.
Xbox Hot Streak Cools
The Productivity and Intelligent Cloud divisions had to pull their weight this quarter, as some of Microsoft's businesses flagged in Q4. It was a disappointing quarter for Xbox, which went from a very healthy 50 percent year-on-year revenue increase in Q3 to a 4 percent decrease in Q4. While Microsoft has struggled to get consoles on shelves, Xbox hardware sales were still up 172 percent year on year, with the decrease in gaming revenue coming down to a simple lack of games to sell. During the same Q4 period last year, Microsoft delivered Gears Tactics and Minecraft Dungeons, and this year they offered, well, nothing. Q1 2022 may suffer a similar fate, as last year Microsoft published four games during the period and this year they’ll publish only two. That said, those two titles are strong ones (Psychonauts 2 and Age of Empires IV) and perhaps Microsoft will be able to get more Xbox Series consoles to retailers.
Xbox wasn’t the only section of the More Personal Computing division dragging its feet – Surface sales were down 20 percent year-on-year and Windows OEM revenue was down 3 percent. That said, Windows Commercial Products and cloud services were up 20 percent.
Q4 2021 really demonstrated the value of Microsoft’s integrated cloud and business productivity stack, as they can easily carry the company to big profits even as other aspects of the company sometimes falter. Based on the words of Microsoft CEO Satya Nadella, it sounds like the company will continue to fall back on its cloud business as they attempt to build up new “franchises” like gaming, LinkedIn, and Microsoft Security…
We are innovating across the technology stack to help organizations drive new levels of tech intensity across their business. Our results show that when we execute well and meet customers’ needs in differentiated ways in large and growing markets, we generate growth, as we’ve seen in our commercial cloud – and in new franchises we’ve built, including gaming, security, and LinkedIn, all of which surpassed $10 billion in annual revenue over the past three years.
Microsoft has ridden out COVID-19 with style and now looks to kick of FY 2021 with a healthy Q1, which they expect to deliver $43.3 billion to $44.2 billion in revenue. If their recent hot streak is any indication, that's a conservative estimate. Looking further into the future, the launch of Windows 11 and the end of Xbox and Surface supply constraints should only boost results further.