Microsoft beats earnings, shares drop after first quarter

Microsoft Corp. sales topped $50 billion for the first time in the holiday quarter of 2021 and easily surpassed earnings expectations, but shares fell late Tuesday.

Microsoft MSFT reported second-quarter earnings of $18.8 billion, or $2.48 a share, up from $2.03 a share a year ago, and revenue jumped to $51.73 billion from $43.08 billion a year ago. The median expected earnings of $2.32 per share on sales of $50.71 billion, according to FactSet.

After the results were released, shares fell by more than 5%. In a note released in the wake of the report, Wedbush analyst Daniel Ives suggested that expectations for strong performance from Microsoft's Azure cloud-computing platform and concerns about the company's forecast - which is expected to be shared later in a conference call contributed to the decline.

The stock is selling off after the market, as the growth came in at 46% and beat the Street at 45%, but was lower than some bullish whisper numbers at 48%, Ives wrote. A year after Microsoft announced plans for the largest tech acquisition of all time, Activision would add to the company s Xbox division as well as the traditional PC business and set a quarterly record for sales at $17. In the holiday quarter, 47 billion dollars were up from $15.12 billion a year ago. The average expected revenue for the year is $16.62 billion, according to FactSet.

While Microsoft executives held a conference call after Activision announced their offer, they took no questions and kept some information close to the vest. Cowen Co. analysts wrote that they expect to hear more color surrounding the Microsoft-Activision proposed acquisition in a conference call later Tuesday, and are looking for information on how the videogame publisher could boost margins in the PC segment.

Microsoft did not quantify potential financial synergies with Activision, aside from the fact that they didn't know about potential financial synergies.

The analysts, who have an outperform rating and $360 price target on the stock, wrote last week in an earnings preview that it would be accretive to EPS upon closing, which could take as long as 18 months. Activision generated 75% of gross margins and 42% EBIT margins in CY 21, so we expect Activision to be margin-accretive to the More Personal Computing segment. After Activision's deal, Call of Duty will stay on Sony s PlayStation console, Xbox boss promises that Call of Duty will stay on Sony's PlayStation console.

While Microsoft is best known to consumers for Windows and Xbox, investors have focused more on the company's cloud business in recent years. Microsoft reported record revenue of $18.33 billion in its Intelligent Cloud segment, up from $14.6 billion a year ago and topping the average analyst estimate of $18.31 billion, according to FactSet.

Microsoft reported that sales for its core cloud computing platform, Azure, increased 46%, while Microsoft does not report revenue for Azure, even as Amazon.com Inc. AMZN and Alphabet Inc. GOOG reveal revenue totals and operating profits for their rival cloud services. According to FactSet, the average expected Azure growth was 45.3%.

The Intelligent Cloud segment is expected to receive a boost from another big-money Microsoft acquisition, Nuance Communications Inc. NUAN, but it didn't close before the end of the quarter, as executives had previously said was possible, due to a review by the U.K. Competition and Markets Authority.

Jefferies analyst Brent Thill wrote a note in a recent note that the deal was expected to close by now and we expect an update, especially as it relates to the impact to guidance.

Opinion: The Big Tech earnings boom is over, and investors are now looking for safety.

A quarter-record revenue for Microsoft was reported by Productivity and Business Solutions, which had revenue of $15.94 billion. The segment that includes Office as well as LinkedIn professional-networking property grew from $13.53 billion a year ago and beat the average analyst estimate of $15.88 billion.

Microsoft shares tend to move again after earnings reports when executives share their forecast for the current quarter in a conference call. The call is scheduled for 5: 30 p.m. Eastern, and Thill noted that Microsoft executives have been topping expectations with their guidance.

Microsoft issued revised guidance of 3.3% above consensus last quarter.

The Jefferies analyst, who has a buy rating and $400 price target, said that the fourth positive guidance beat in a row was not always the case. Microsoft had missed 6 of 8 quarters before the last 4 Qs. Microsoft stock was down 2.7% Tuesday at $288.49, a 2.7% decline as markets suffered through another volatile trading day. The Dow Jones Industrial Average DJIA, which counts Microsoft as a component, added 11%, and has gained 25.7% in the past year.