Microsoft (MSFT) reported on Tuesday better-than-expected earnings and revenue for its fiscal second quarter of 2022 (calendar fourth quarter 2021).

On the top line, total revenue of $51.7 billion (+20% YoY) exceeded the consensus estimate on FactSet of $50.711 billion. Microsoft's profitability looked stronger than anticipated as well, with 67% gross margins (flat YoY), edging estimates of 66.65%, and 42.9% operating margins (+1% YoY) was a big beat against the 41.24% estimate. On the bottom line, Microsoft earnings per share of $2.48 (+22% YoY) exceeded estimates of $2.31.

Operating Segments

Starting with Productivity and Business Processes, revenue of $15.94 billion (+19% YoY CC) edged the $15.877 billion consensus while operating income of $7.69 billion (+24% YoY CC) exceeded expectations of $7.515 billion.

• Within the segment, Office Commercial products and cloud services revenue increased 14% YoY CC as Office 365 Commercial seats grew 16% YoY. 

• Office consumer products and cloud services revenue grew 15% YoY CC with Microsoft 365 Consumer subscribers increasing to 56.4 million, up from 54.1 million in the prior quarter

• Dynamics products and cloud services revenue advanced 29% YoY CC, while Dynamics 365 revenue surged 44% YoY CC thanks to a 161% increase from Power Apps. 

• Finally, revenue at LinkedIn, a clear beneficiary of a tight labor market, increased 36% YoY CC as LinkedIn sessions grew 22% with record engagement.

In the Intelligent Cloud, revenue of $18.33 billion (+26% YoY CC) edged the $18.312 billion estimate, while operating income of $8.20 billion (+37% YoY CC) was higher than expectations of $8.079 billion.

• Digging into the segment, server products and cloud services revenue grew 29% YoY CC.

• Keep in mind that the one number that arguably matters more than any other single metric in the eyes of Wall Street is Azure and other cloud services revenue growth, which checked in this quarter at +46% YoY. 

• We believe this number is being nitpicked in after-hours trading tonight because even though Azure growth exceeded the street estimate of about 45%, the "whisper number" may have been a couple percentage points higher.

• Furthermore, Azure revenue growth decelerated about 200 basis points from the fiscal first quarter's growth rate of 48%. 

• Some may call this is a slowdown, but we believe that to be a false narrative and it is more a result of the law of large numbers. 

• And as we learned in next quarter's guidance (more below) management expects to see strong growth in Azure next quarter. 

Elsewhere within the segment, Enterprise Services revenue increased 8% YoY CC, server products revenue grew 6%, and the enterprise mobility installed base grew 28% to over 209 million seats. 

Personal Computing

Lastly, PC sales hit $17.47 billion (+15% YoY CC), nicely outpacing the $16.618 billion estimate, while operating income of $6.36 billion (+21% YoY CC) was a big beat over estimates of $5.384 billion. 

• Driving the segment, Windows OEM revenue surged 25% YoY thanks to growth in the PC market, especially in commercial with higher revenue per licenses. 

• Windows commercial products and cloud services revenue grew 14% YoY CC. 

• Surface revenue return to growth and increased 8% YoY, driven by sales of the Surface Laptop. 

• Search and news advertising revenue excluding traffic acquisition costs (TAC) increased 32% YoY CC with improved customer advertising spend

• In gaming, total revenues increased 8% with Xbox content and services revenues up 10% YoY thanks to growth in first-party titles and Game Pass subscriptions, which is now over 25 million across PC and console. We can't wait to see what Microsoft does with GamePass next after its acquisition of ActivisonBlizzard goes through. 

• Xbox hardware revenues increased 3% YoY CC as Microsoft continues to see strong demand for the Xbox Series X/S. The only thing holding back console sales right now is supply constraints. 

Guidance

Segment revenue guidance was as follows:

• Productivity and Business Processes: $15.6 to $15.85 billion, which at a midpoint of $15.73 billion is in line with estimates of $15.758 billion. 

• Intelligent Cloud: $18.75 to $19 billion, representing a beat even at the low end relative to consensus estimates of $18.562 billion. Importantly, management expects Azure revenue growth to be up sequentially in CC. This should relieve any fears of a slowdown in the cloud. 

• More Personal Computing: $14.15 billion to $14.45 billion, a beat versus the $13.652 billion estimate.

Adding that all up, we get a total revenue guide of $48.5 billion to $49.3 billion which at a midpoint of $48.9 billion is nicely higher than estimates of $48.113 billion. Management now sees full margins being slightly up YoY, an improvement from their prior outlook of down. 

Our take

This was a great quarter from Microsoft, supplemented with an even stronger outlook, which relieves all doubts about technology companies' ability to continue putting up good earnings. 

Now that we know Microsoft's business is still performing at a very high level and no signs of a slowdown in sight, what we have to figure out next is at what price does it make sense to buy the stock? With MSFT down about 15% from its high as of today's close and currently trading at about 29x CY 2022 earnings estimates—that will likely be revised higher to reflect the strong guide—we think a buy right here has great value. But brace yourselves. One good quarter from Microsoft does not mean the volatility in the market is over just yet. As we have seen over the past month, no company is immune to broader market pressure. So as we would say with almost any buy, it's always important to leave room to scale in deeper at potentially lower prices just in case the market has different plans.