Microsoft Q2 FY2022 Earnings Report Preview: What to Look For

Microsoft Corp. (MSFT) has powered through the COVID-19 pandemic with robust earnings and revenue growth. The company's cloud computing business has been a major driver as increasing numbers of businesses demand cloud services amid the expansion of the work- and study-from-home economy. Microsoft is now focusing on bolstering its gaming business, which has also benefitted from the pandemic. In a major step, the company announced last week that it has agreed to acquire video game giant Activision Blizzard Inc. (ATVI)—maker of popular games like Call of Duty and World of Warcraft—for $68.7 billion.

Investors will be watching to see if Microsoft can maintain its strong financial performance when the company reports earnings on Jan. 25, 2022 for Q2 FY 2022. Microsoft's fiscal year (FY) ended in June. Analysts expect earnings per share (EPS) to rise but at the slowest pace in six quarters. Revenue is also expected to increase but at its slowest in four quarters.

Investors will also be focused on Microsoft's gaming revenue, a key metric gauging the amount of sales the company generates from its video game hardware, software, and related services. Microsoft said that when its acquisition of Activision Blizzard is complete, which is expected to occur sometime in fiscal year 2023, it would "become the world's third-largest gaming company by revenue." It's clear why Microsoft needs the Activision Blizzard deal. For the recent fiscal second quarter, analysts expect revenue from Microsoft's current gaming business to increase at its slowest pace in seven quarters.

Shares of Microsoft have outperformed the broader market over the past year. The stock's outperformance gap with the rest of the market began to widen in early June 2021. However, the stock has fallen at a faster pace than the rest of the market over the past several weeks. Microsoft shares have provided a total return of 32.7% over the past year, above the S&P 500's total return of 14.1%.

Microsoft Earnings History

Microsoft reported Q1 FY 2022 earnings and revenue that beat analyst expectations. The company's EPS rose 49.0% compared to the year-ago quarter, its fastest pace since the final quarter of FY 2019. Revenue expanded 22.0% year over year (YOY), marking its fastest pace in at least 13 quarters. The company noted that revenue from Azure, its cloud-computing platform, and other cloud services grew 50%.

In Q4 FY 2022, earnings and revenue surpassed consensus estimates. EPS rose 48.3% YOY, continuing an acceleration trend begun in the first quarter of the year. Revenue grew 21.4% compared to the year-ago quarter, marking the fastest pace of growth out of any quarter in at least the past three years. Microsoft's Intelligent Cloud unit, which includes Azure as well as server products and other cloud services, led all other segments in revenue growth for the quarter.

Analysts expect a slowdown in the growth of Microsoft's EPS and revenue in Q2 FY 2022. EPS is expected to rise 13.8% YOY, which would be the slowest pace since the company reported an EPS decline in the final quarter of FY 2020. Revenue is forecast to rise 18.0% YOY, the slowest pace since Q2 FY 2021. For full-year FY 2022, analysts estimate EPS will rise 18.2%, a significant slowdown from last year's growth of 39.7%. Annual revenue is expected to increase 17.1%, a slight deceleration from last year's pace.

^{Source: Visible Alpha}

The Key Metric

As mentioned above, investors will also be focusing on Microsoft's gaming revenue. This key metric measures the amount of sales generated by the gaming component of the company's More Personal Computing segment. It includes sales of Xbox hardware and Xbox content and services, Xbox Game Pass and other subscriptions, video games, third-party video game royalties, cloud services, advertising, and more. Microsoft is seeking to expand its video game offerings, as its recent announcement to acquire Activision Blizzard makes abundantly clear. The acquisition, when completed, will be the company's largest acquisition ever. It will also be the second major video game-related acquisition in the past year after the company acquired ZeniMax Media and its game publisher, Bethesda Softworks, for $7.5 billion nearly a year ago.

The acquisition will dramatically increase the size of Microsoft's gaming business. Activision Blizzard reported net revenues of $2.1 billion in Q3 of its 2021 fiscal year, the three-month period ended Sept. 30, 2021. That figure was up 5.9% from the same quarter a year ago. By comparison, Microsoft reported gaming revenue of $3.6 billion in its fiscal Q1, the quarter coinciding with Activision Blizzard's fiscal Q3.

Microsoft's gaming revenue accelerated dramatically in FY 2021, which ended in June 2021, as people sheltering at home amid the COVID-19 pandemic increased their consumption of video game entertainment. Annual gaming revenue rose 32.8%, significantly faster than the 1.7% annual pace set in FY 2020, and the fastest pace in at least five years. The rapid growth, however, was already beginning to subside by the final quarter of FY 2021, during which gaming revenue rose 10.6% YOY. It then picked up to a pace of 16.2% YOY in Q1 FY 2022. For Q2 FY 2022, analysts expect Microsoft's gaming revenue to grow 7.9%, which would be the slowest pace since the company reported a decline in gaming revenue in Q3 FY 2020. For full-year FY 2022, analysts expect annual gaming revenue to expand 6.8%.