PhillipCapital analyst Timothy Ang has kept his “buy” call on Microsoft, raising his FY2022 PATMI estimate by 3.5% on stronger revenue guidance and lower tax rate.

Following Microsoft's 3QFY2022 results, Ang highlights that all segments beat revenue estimates. In Productivity and Business Processes, for example, Microsoft’s commercial Office 365 and LinkedIn performed better than expected.

“Paid Office 365 commercial users grew 16% to 345 million, exceeding our FY2022 end target of 341 million due to demand from small and medium business and frontline worker offerings,” says Ang.

More Personal Computing benefited from continued strength for Microsoft 365 and commercial personal computers, as well as surge in search advertising on LinkedIn — up 33% from a sharp demand uptick that started three quarters ago as the economy reopened amid a tight labour market.

Meanwhile, in Intelligent Cloud, Azure grew 49% y-o-y versus estimates of 47%, with continued consumption of cloud services.

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Microsoft also saw another quarter of margin beats, Ang points out. Its 3QFY2022 operating margins from Productivity and Business Processes, Intelligent Cloud and More Personal Computing were 46%, 44% and 34% respectively, all higher than estimates of 44%, 40% and 33% respectively. Average revenue per user (ARPU) was higher from continued momentum for Microsoft’s higher-end E5 licenses.

Azure cloud services margins continued to improve, while the faster-growing, higher-margin LinkedIn services that reached a record high of 13% of total revenue this quarter also helped to boost margins, says Ang.

That being said, Microsoft’s revenue was negatively impacted by the stronger US dollar. Foreign exchange decreased revenue growth by 3%, 1% more than expected, says Ang. The stronger US dollar is guided to decrease revenue by 2% in 4QFY2022 while decreasing cost of goods sold and operating expenses by 1%, a net negative to operating margins.

Moving forward, 4QFY2022 was guided to be another strong quarter for Microsoft, says Ang. The economic reopening will drive Office commercial user growth from small to medium-sized businesses, while cybersecurity will drive ARPU growth through upgrades to premium E5 licenses.

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“Azure will continue to benefit from businesses’ shift to the cloud. Microsoft stated that large (over US$100 million) long-term contracts for Azure saw better-than-expected growth even against a very strong prior year comparable. Customers are not looking at cutting IT budgets despite slowing economic growth,” adds Ang.

Ang’s target price remains unchanged at US$410.

Shares in Microsoft closed US$12.12 lower or 4.55% down on May 18 at US$254.08.

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