Microsoft Crushes Earnings, MSFT Stock Pops

Software giant Microsoft Corp. (ticker: MSFT) easily beat analysts estimates in its fiscal fourth-quarter earnings report Tuesday afternoon, wrapping up a year that saw the company make its biggest deal ever when it purchased LinkedIn Corp. (LNKD), the leading social network for professionals, for $26.2 billion in an all-cash deal.

The LinkedIn deal was easily the news of the quarter for Microsoft, but on Tuesday, the company’s core business was in focus – and the core business is doing quite well. Redmond, Washington-based Microsoft beat on earnings, although revenue fell year-over-year.

MSFT stock posted adjusted earnings per share of 69 cents on adjusted revenue of $22.64 billion. Analysts were expecting earnings per share of 58 cents on revenue of $22.14 billion. In the year-ago period, MSFT earned 60 cents per share on revenue of $22.18 billion. Shares quickly advanced more than 3 percent on the news.

Before Tuesday afternoon’s report, MSFT stock was down about 4.3 percent on the year.

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Microsoft returned $6.4 billion to shareholders last quarter through dividends and buybacks.

The Windows operating system remains the company’s most significant cash cow. Although Microsoft recently said its goal of 1 billion monthly active Windows 10 users wouldn’t be achieved by the 2018 fiscal year, the operating system still has over 350 million users and counting.

That said, Microsoft is still in a hurry to diversify away from Windows as the personal computing market continues to stagnate. Its decision to morph Microsoft Office into a subscription-based cloud offering with Office 365 has been widely hailed as a savvy move that generates a more consistent stream of recurring revenue. “Office 365, the web-based version of Office, increased by 5 percent, has been adopted at a faster pace than before. This is because users pay less licensing fees to adopt in the front end, compared with the traditional Office versions,” says K C Ma, a finance professor at Stetson University.

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Microsoft Azure, the company’s corporate-facing cloud computing service, has been a point of pride for Microsoft and one of the areas the company has been looking to for growth. Although it currently plays second-fiddle to Amazon.com’s (AMZN) Amazon Web Services, Azure revenue soared 120 percent in the fiscal third quarter and posted 102 percent revenue growth in the most recent quarter. Ma notes that this is better than the 95 percent consensus and that “Microsoft is being rewarded for its many years’ strategic move away from the conventional software sales into the cloud business of the future.”

Since taking over in 2014, CEO Satya Nadella has been refocusing Microsoft on the cloud, a sharp change in strategy following the decade-plus reign of former CEO Steve Ballmer. Ballmer oversaw a period where Microsoft missed out on the mobile and tablet megatrends that helped make Microsoft rival Apple (AAPL) the largest company in the world.

Part of Microsoft’s transformation has been its pivot away from the PC market, where the relative success of its Surface tablets is an important part of the strategy. Surface revenue grew 9 percent in the fourth quarter.

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Microsoft’s report follows tech darling Netflix’s (NFLX) disappointing earnings report Monday, which sent shares plunging after underwhelming subscriber numbers sent investors running for the exits.

Packaged Software Stocks

Fund Price 1-Year Return

Xactly Corp

XTLY

$12.21 49.39%

Paycom Software Inc

PAYC

$46.29 33.19%

Gigamon Inc

GIMO

$41.32 29.65%

Rovi Corp

ROVI

$17.52 29.13%

Paylocity Holding Corp

PCTY

$44.08 23.29%

Simulations Plus Inc

SLP

$8.02 20.72%

Microsoft Corp

MSFT

$53.09 18.73%

Sapiens International Corporation NV

SPNS

$12.61 18.31%

Magic Software Enterprises Ltd

MGIC

$6.92 13.82%

Sabre Corp

SABR

$29.07 13.35%

Stock information correct as of June 19, 2016 at 4:45 p.m. EST.

Or see U.S. News’ list of Packaged Software stocks »

John Divine is a staff writer for U.S. News & World Report. He is also a longtime investor, and has previously written about investing and the markets for InvestorPlace and The Motley Fool. You can follow him on Twitter @divinebizkid or give him the Tip of the Century at jdivine@usnews.com.