Microsoft Corporation (MSFT) on Q2 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to the Microsoft Fiscal Year 2021 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Spencer, General Manager, Investor Relations. Thank you, sir. You may begin. Michael Spencer: Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella, Chief Executive Officer; Amy Hood, Chief Financial Officer; Alice Jolla, Chief Accounting Officer; and Keith Dolliver, Deputy General Counsel. Satya Nadella: Thank you, Mike. It was a record quarter driven by our commercial cloud, which surpassed $16 billion in revenue, up 34% year-over-year. What we are witnessing is the dawn of a second wave of digital transformation sweeping every company and every industry. Digital capability is key to both resilience and growth. It's no longer enough to just adopt technology. Businesses need to build their own technology to compete and grow. Microsoft is powering the shift with the world's largest and most comprehensive cloud platform. Amy Hood: Thank you, Satya. And good afternoon, everyone. This quarter revenue was $43.1 billion up 17% and 15% in constant currency. Earnings per share was $2.03 increasing 34% and 31% in constant currency. Across our business results exceeded expectations driven by strong execution and improving trend across industries, customer segments and geographical markets resulting in double digit top and bottom line growth. In our commercial business customers prioritize their digital transformation which drove healthy demand for our hybrid and cloud offerings with material growth in the number of $10 million plus Azure and Microsoft 365 contracts. We saw stronger Azure consumption as well as higher usage of Teams, Power Platform and our advanced security and compliance offerings and within our small and medium business customer segments transactional licensing trends continued to show some improvement. our Windows OEM, Office consumer and a surface businesses. The advertising market continue to show improvement benefiting our search and LinkedIn businesses and in gaming, we saw record engagement and monetization across our platform as well as console demand that has significantly exceeded supply following the Xbox series X and S launches. Moving to our overall results. Even with the declining expiration base and a strong prior year comparable commercial bookings increased 19% and 11% in constant currency. Strong execution across our core annuity sales motions including the Azure and Microsoft 365 momentum that earlier drove the better than expected result. Commercial remaining performance obligation increased 24% to 22% of constant currency to $112 billion with a roughly equivalent split between the revenue that will be recognized within and the portion beyond the next 12 months. And our annuity mix increased 4.0 over year to 93%. Commercial cloud revenue was $16.7 billion as growth accelerated to 34% and 32% in constant currency. Commercial cloud gross margin percentage expanded 4.0 points year-over-year to 71% driven by the change in accounting estimate for the useful life of server and networking equipment assets. Excluding this impact commercial cloud gross margin percentage was up slightly. As a reminder revenue mix shift to Azure increased customer usage of our productivity and collaboration solutions and continue strategic investments to support customers success and the deployment of our solutions will continue to impact gross margin. With the weaker U.S. dollar FX increased revenue growth by approximately 2 points about a point more favorable than anticipated. FX had no impact on comps growth and increased operating expense growth by approximately one point both in line with expectations. Gross margin dollars increased 18% and 16% constant currency. Gross margin percentage was 67% up slightly year-over-year with roughly 2 points of favorable impact from the change in accounting estimate noted earlier. Excluding this impact company gross margin percentage was down driven by the sales mix shift to cloud and gaming. Operating expenses increased 3% and 2% constant currency lower than anticipated driven by greater than expected COVID related savings, reductions and retail store expenses and investments that shifted to future quarters. Overall company headcount grew more than 10% to year-over-year with our focused investment in key areas such as customer success, cloud engineering and sales. Operating income increased 29% and 26% in constant currency and operating margins expanded 4 points year-over-year to 42% including roughly 2 points of favorable impact from the change in accounting estimate and nearly one point of variable impact from COVID related savings. Now to our segment results. Revenue from productivity and business processes was $13.4 billion increasing 13% and 11% in constant currency ahead of expectations primarily driven by office commercial and LinkedIn on a stronger prior year comparable and included roughly 3 points of benefits primarily from transactional strength in Japan. Office commercial revenue grew 11% and 9% in constant currency. Office 365 commercial revenue grew 21% and 20% constant currency. Results were driven installed base expansion across all workloads and customer segments as well as higher ARPU. The strong demand for Microsoft 365 noted earlier particularly for our security, compliance and voice components drove E5 revenue growth acceleration again this quarter. Paid Office 365 commercial seats increased 15% year-over-year with strong conversion of our free trial offers. We also saw a steep growth improvement in our small and medium business and first line worker offerings. Office consumer revenue grew 7% and 6% in constant currency on a strong comparable that included roughly 7 points of benefit from transactional strength in Japan. Microsoft 365 consumer subscriptions grew to 47.5 million up 28% year-over-year. Dynamics revenue grew 21% and 18% in constant currency driven by Dynamics 365 revenue growth of 39% and 37% in constant currency. The number of customers adopting multiple Dynamics 365 workloads accelerated again this quarter. LinkedIn revenue increased 23% and 22% in constant currency significantly ahead of expectations. Growth in our marketing solutions business accelerated to 53% benefiting from the stronger advertising market noted earlier. Segment gross margin dollars increased 13% and 11% in constant currency and gross margin percentage was relatively unchanged year-over-year with roughly 2 points of favorable impact from the change in accounting estimate. Operating expenses increased 4% and 3% in constant currency and operating income increased 19% and 17% in constant currency, including 5 points due to the change in accounting estimate. Next the Intelligent Cloud segment. Revenue was $14.6 billion ahead of expectations increasing 23% and 22% in constant currency. Server products and cloud services revenue increased 26% and 24% in constant currency. Azure revenue grew 50% and 48% in constant currency driven by strong growth in our consumption based business that benefited from Improvement across industries and customer segments noted earlier. Our per-user results were also better than expected driven by accelerated growth in our enterprise mobility and security installed base up 29% to over 163 million seats and on a strong prior year comparable that included roughly 4 points of benefit from the end of support for Windows Server 2008. Our on-premise server business increased 4% and 3% in constant currency with strong annuity performance driven by continued demand for our hybrid and premium offerings. Enterprise services revenue grew 5% and 4% in constant currency again driven by premier support services. Segment gross margin dollars increased 29% and 27% in constant currency and gross margin percentage increased 3 points year-over-year with roughly 3 points of favorable impact from the change in accounting estimate. Operating expenses increased 12% and 11% in constant currency and operating income grew 43% and 41% in constant currency with roughly 10% favorable impact from the change and accounting estimate. Now to More Personal Computing. Revenue was $15.1 billion increasing 14% and 13% in constant currency and better than expected performance across all businesses. In Windows, the stronger PC market resulted in overall OEM revenue growth of 1% despite a strong prior year comparable and OEM pro from the end of support for Windows 7. OEM non-pro revenue grew 24% and OEM pro revenue declined 9%. Inventory levels ended the quarter in the normal range. Windows commercial products and cloud services revenue grew 10% and 8% in constant currency driven by continued demand for Microsoft 365 and our advanced security solutions. In Surface revenue grew 3% and 1% in constant currency. Search revenue ex TAC increased 2% and 1% in constant currency benefiting from the improved advertising market noted earlier. And in Gaming revenue increased 51% And 50% in constant currency. Xbox hardware revenue grew 86% driven by the new console launch as well as the benefit from lower price promotions on our prior generation consoles. Xbox content and services revenue grew 40% and 38% in constant currency the strong growth in third party transactions, Game Pass subscribers and first-party titles. Segment gross margin dollars increased 11% and 9% in constant currency and gross margin percentage decreased 2 points year-over-year driven by sales mix shift to gaming. Operating expense decreased 10% and operating income grew 25% and 22% in constant currency. Now back to total company results. Capital expenditures including finance leases were $5.4 billion up 20% year-over-year to support growing global demand and customer usage of our cloud services. Cash paid for PP&E was $4.2 billion. Cash flow from operations was $12.5 billion increased 17% year-over-year as strong cloud billings and collections were partially offset by payments related to a tax audit settlement. Free cash flow was $8.3 billion up 17%. Excluding the impact of these tax payments cash flow from operations and free cash flow grew 33% and 41% respectively. Other income and expense was $440 million higher than anticipated primarily driven by net gains on investments including mark to market gains on our equity portfolio as well as net gains on foreign currency remeasurement. Our effective tax rate was approximately 16% in line with expectations. And finally we returned $10 billion to shareholders through share repurchases and dividends; an increase of 18% year-over-year. Now let's move to our outlook. My commentary for both the next quarter and any remarks for the full year does not include any impact from the ZeniMax acquisition which we still expect to close by the end of the fiscal year. In our commercial business, consistent execution, focus on customer success and a compelling solution portfolio in high growth markets should drive another strong quarter. In our consumer business we expect to see healthy demand for PCs and productivity tools continue. The growth rates will again be impacted by the end of support for Windows 7 last year. In Gaming, we expect continued strong engagement on the Xbox platform and significant demand for the Xbox series X and S that will still be constrained by supply and our search in LinkedIn businesses should benefit from the improving advertising market. In commercial bookings we have a growing Q3 expiry base and a low prior year comparable. So strong execution across our core annuity sales motions and increased commitment to our cloud platform should drive healthy growth. As a reminder an increasing mix of large long-term Azure contracts which are more unpredictable in their timing can drive quarterly volatility and the growth rates. Commercial cloud gross margin percentage increased by approximately 3.0 year-over-year again driven by the change in accounting estimate. Excluding this impact continued improvement in Azure IaaS and PaaS gross margin will be offset by revenue make shift to Azure and continued investments to support our customer success. We expect a sequential increase on a dollar basis to our capital expenditures as we continue to invest to meet growing global demand for our cloud services. Now to FX. Based on current rates we expect FX to increase total company revenue COGS and operating expense growth by approximately 2 points. Within the segments FX should increase productivity and business processes revenue growth by approximately 3 points and intelligent cloud and more personal computing revenue growth by approximately 2 points. Now to segment guidance. In productivity and business processes we expect revenue between $13.35 billion and $13.6 billion. In Office commercial revenue growth will again be driven by Office 365 with continued upsell opportunity to E5. In our on-premise business though we anticipate continued improvement in transactional purchasing trends we expect revenue to decline in the mid to high teens range consistent with the ongoing customer shift to the cloud. In Office consumer on a strong prior year comparable revenue growth should be similar to last quarter with continued growth in Microsoft 365 subscription revenue. In LinkedIn we expect continued strong engagement on the platform to drive revenue growth in the low 20% range and in dynamics continued momentum will drive revenue growth similar to last quarter. For Intelligent Cloud we expect revenue between $14.7 billion and $14.95 billion. In Azure revenue will again be driven by strong growth in our consumption-based business and in our per-user business we expect continued benefit from Microsoft 365 suite momentum. In our on-premise server business we expect revenue growth to be in the low to mid single digits driven by continued demand for our hybrid and premium annuity offerings on a strong prior year comparable that included the benefit from the end of support for Windows server 2008. And Enterprise services revenue growth should be roughly in line with last quarter. In More Personal Computing we expect revenue between $12.3 billion and $12.7 billion. In Windows overall OEM revenue growth should be in the low single digits on a strong comparable mentioned earlier. Windows commercial products and cloud services growth should be in the low to mid teens driven by continued demand for Microsoft 365 and our advanced security solutions. And in Surface good demand against a low prior comparable should drive growth in the mid to high teens range. In Search ex TAC growth should be driven by improvements in the advertising market and in Gaming we expect revenue growth of approximately 40% driven by next generation console sales as well as Xbox content and services revenue in the mid 20% range. Now back to the company guidance. We expect COGS of $13.1 billion to $13.3 billion and operating expense of $11.9 billion to $12 billion. Another income and expense interest income and expense should offset each other. We expect our Q3 tax rate to be approximately 15% slightly lower than our full year rate of approximately 16%. And finally, for FY21 with our strong performance in the first half of the fiscal year and our outlook for Q3 we expect to deliver another full year of double-digit revenue and operating income growth as well as healthy operating margin expansion even after excluding the impact of the change in accounting estimate and COVID related savings. In closing, we have executed well in the first half of our fiscal year in a challenging and changing environment. Investments made over quarters and often years coupled with focused execution by our teams are the drivers behind a compelling portfolio that is delivering value today for our customers and creating optimism in our roadmap for tomorrow. Satya discussed our unique, comprehensive and integrated set of products earlier on the call; products and services that span large growth markets and we will continue to invest broadly and boldly against the significant opportunities ahead of us. With that, Mike, let's go to Q&A Michael Spencer: Thanks, Amy. We'll now move over to Q&A. As respect to others on the call, we request that participants please only ask one question. Operator, could you please repeat your instructions? Mark Moerdler: Thank you for taking my questions, and Satya and Amy and the whole team congratulations on the great quarter. It seems like almost every part of the business beat, there did not seem to be any meaningful impact from COVID or tougher comps. Two parts to the question: one, should we feel that the COVID impact is basically behind you? And two, is the tougher comps are we now seeing the demand as such that allows you to build on those larger numbers? Thanks. Satya Nadella: Thanks, Mark. Maybe I'll start and Amy you can add to it. I think one of the things that we're seeing is the COVID impact has put a lot of constraints on our all our customers. But the one structural change is the digital technology is becoming critical even for core resilience and business continuity and to deal with what is going to be a structurally changed customer behavior and expectations. So as a tech company with that comprehensive differentiated portfolio all the way from business applications, industry solutions to infrastructure, I think, we benefit from that and that's what you saw this quarter. But more importantly, for me, Mark, when I look at the next 10 years of what compute and digital technology will do across industries, that's the opportunity that we are obviously staying very, very focused on and investing in. Amy Hood: And, Mark, maybe to the second-half of your question on being past some tougher comparables, I don't think we are and it's why I mentioned a couple of them, most particularly, I think, the OEM number with the pro end of support in Q3 and we did have another strong end of support for the server on-prem number. And so those are the two for Q3 in particular that I would make sure to call out. Mark Moerdler: Thank you very much and congratulations again. Stay safe. Michael Spencer: Thanks, Mark. Operator, we'll take next question, please. Operator: Thank you. Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question. Brent Thill: Thank you. Azure putting up a great accelerating quarter. Could you just talk to what you're seeing in terms of the breadth and maybe the size of the transactions? And anything else that you think is important to highlight why you're seeing this reacceleration in the business? Thank you. Satya Nadella: Thanks, Brent. Maybe again I'll start, Amy you can add. I would say again with Azure, some of the core differentiation we have whether it comes to our hybrid leadership, some of the new data products that are highly differentiated and competitive in the marketplace as well as the integration with every other layer of our stack whether it's the dev layer with Power Platform or Github or with Teams to Power Apps to Azure DB, the industry solutions we now have in healthcare and in retail are all leading to that time to value the price differentiation and cost advantage to customers and most importantly, agility -- their ability to build their own digital capability. So that's what you see in the acceleration around Azure. But when we think about Microsoft Cloud, we think about all the parts coming together to deliver value and differentiation to our customers. A – Amy Hood: And maybe just to add a couple of thoughts on the shape, Brent, and to make sure that we're clear on some of the important drivers there, really, the Azure consumption comments are not about size of transactions, right, being signed and you obviously saw we had a good quarter in bookings, which is far more reflective of future commitment. In quarter, what we saw is really fundamental consumption growth and some reacceleration of growth curves, particularly in maybe industries that had been more hard hit in Q4 and Q1. And so I would describe it a little bit that way and including frankly, even some mid-market and some segment-based recovery on that front. So as I look forward, obviously, it's about what Satya talked about, which is there is differentiation, there is usage, there is looking forward to making sure that we continue to have great bookings numbers. But in the quarter itself, it was usage growth not the contracting that made a difference. Brent Thill: Thank you. Michael Spencer: Thanks, Brent. Operator, we'll take next question, please. Operator: Thank you. Our next question comes from the line of Karl Keirstead with UBS. Please proceed with your question. Karl Keirstead: Thank you. Amy, I wanted to ask you about the PBP guide for your third quarter or the March quarter. It was comfortably above where everybody, I think, is modeling. And in particular, I wanted to ask you about Office 365. Of all the businesses, the larger ones in Microsoft, most saw upside in this recent quarter except perhaps for Office 365, where despite the migration to E5 and despite the free-to-paid seat conversion, we really didn't see an acceleration in Office 365. I'm wondering if you could perhaps unpack that and describe why? And part two to the question is your guide for that segment is so good in the March quarter that one would infer that the Office 365 growth is likely to accelerate in March. I'm wondering if you could confirm whether that's a reasonable assumption? Thanks so much. Amy Hood: There's a couple of things, Karl, in the PBP guide and let me break them down a little bit. As you heard, actually, almost all the components in Q3 have sort of consistent to slightly better execution, right?. So there is upside that we saw in LinkedIn. There is upside in Office Commercial. There is upside that's reflected in the stronger subscriptions number we saw in consumer and there is good execution and dynamics. So for me, it's a bit more and then we'll come back and talk about Microsoft 365 all up in a second. Each of those pieces, there is really consistent performance into Q3, which is good. And so when you think about Office 365, interestingly, what we're seeing is a lot of the things we had seen before. But remember, we had a pretty tough comp a year ago in Office Commercial. And so for me, I look and say, gosh, we did great execution. We saw some improving trends in seat growth in the frontline; improving trends in SMB that won't yet be reflected, of course, in revenue; seeing good trial conversion, which again speaks to forward revenue more than in-quarter revenue given that's all subscription. And we saw - so you see better seat growth, good conversion and good E5 selling. So I actually feel pretty good leaving Q2 and entering Q3 in terms of value that customers are getting out of the subscriptions that they've got and the conversions that we're seeing in market. Satya Nadella: Yes, I mean just one quick thing I would add is, when you look at Microsoft 365, I think, one of the things that one of the best things I've seen recently is when a customer talked about all the things that they're using compared to even just last year to now, that is new value from Office 365 and the usage depth and increase. That's I think really the real power of that franchise going forward. And so I hope, as shareholders, look at what's the depth and breadth of the offering and the usage and the usage depth by account, which I think is what at least we are investing and tracking closely. Karl Keirstead: That's helpful. Thank you both and congrats on the numbers. Michael Spencer: Thanks, Karl. Operator, we'll take next question, please. Operator: Thank you. Our next question comes from the line of Keith Weiss with Morgan Stanley. Please proceed with your question. Keith Weiss: Excellent. Thank you for taking the question guys and very nice quarter. Satya I wanted to dig into one of the topics that you mentioned in your introduction and that's kind of Teams working as a framework across all of your solutions and sort of connecting more and more people into the Microsoft framework. I was doing some calls this quarter and asking about a competitor's acquisition of a Team's competitor and a lot of people in the channel talk to me about how Teams was pulling through dynamic CRM and they understood that acquisition as a defense against that and I was surprised to hear that that there would be a linkage between the two. Could you help us one kind of understand how Teams pulled in additional products behind it number one and number two the connection between kind of Teams and how they get a broader base of frontline workers into the story from Microsoft because I think most people think about Microsoft is like an information worker story for frontline workers is another huge kind of area for you guys to go after. Satya Nadella: No, thanks much Keith for the question. That is absolutely right and I think I commented on this earlier as well in our calls which is we built Teams as essentially this tool that brings together multiple capabilities. It brings together chat. It brings together meetings, collaboration that is office collaboration as well as business process workflow all into one scaffolding. That's the biggest breakthrough of Teams. In the past obviously we had suites of tools but this is the first product more so than Outlook was even in terms of being able to integrate communications, collaboration and business process and that's what you see when we talked about it. In my comments that's why one of the things I stressed was what was happening with just line of business applications before any SaaS application ours or others the reality is the most usage in any enterprise is line of business applications that were built custom by that enterprise and their IT organizations for all the departments whether it's HR or finance or operations. That is really one of the bigger drivers of Teams usage as a platform capability. So you can think you brought up first line. There is some shift scheduling application, some inventory counting application that the frontline person is using on a mobile phone with Teams but the inventory management app was just a Power app built using Power apps so that is what you're seeing and then of course the integrations into dynamics, integrations into all SaaS applications whether it's workday or whether it's SAP or whether it is ServiceNow and even Salesforce all of these applications are getting integrated into Teams very rapidly and so that's the power of Teams as a platform capability that we're seeing and you're absolutely right that this is no longer about just knowledge workers collaborating. In fact, if anything it's about knowledge workers collaborating and enabling frontline workers with more of these work to participate with digital tools in the workflow versus being disconnected. Keith Weiss: Thanks. That's a fascinating experience story. Thanks for digging in on it with us. Michael Spencer: Thanks Keith. Operator we will take the next question, please. Operator: Thank you. Our next question comes from the line of Mark Murphy with JP Morgan. Please proceed with your question. Mark Murphy: Yes. Thank you very much and I'll add my congrats as well. Amy do you see a sustainably different post-COVID expense profile for Microsoft as it relates to real estate footprint and T&E levels and maybe Satya you could perhaps comment on this as well. Are you expecting a fuller return to the Office and fuller resumption of business travel over time such that expense profile wouldn't look very different? Satya Nadella: Maybe I'll just talk about broadly how I think both at Microsoft as well as what we are seeing as this return to work. I think the key thing Mark we just think about is there will be more flexibility in terms of time, where they work even, the site's people work because I think the expectations have changed. We obviously are not going to have the same constraints going forward. So I'm not at all assuming that we just remain as is all the way going forward. But at the same time there is no return to January of 2020. So therefore what I think is key for us is to really should maintain flexibility and that's why even going back to the conversation around Teams it's not like the work only happens in online meetings. Work happens before meetings, during meetings, after meetings and especially in hybrid work you need that sophisticated set of tools that really track workflow irrespective of who is where and so that's what we are focused on and in our own policies we have laid out of policies which give more flexibility and it'll be different by function, different by geography, different in time. So that's how we expect essentially work to evolve. I don't know Amy if you want to add a little more on the expense side. Amy Hood: Yes, I think what I would add is maybe to take a step back from the narrowness in some ways of the question Mark and expanded to say the overall expense logic that we have going forward and in many ways that's why I talked about, we've seen headcount growth of over 10% in the past year as we invest in the significant opportunities we see and having customers be successful and that's at a time when frankly we are coming up on the anniversary across many spots of the world of where we've been working remotely for close to a year. And so it's about continuing to invest in those places, looking and learning about the types of flexibility that we are able to provide our own employees, what travel patterns need to look like and of course will do what it takes to deliver success to customer which should be the driving force behind how we invest in that segment and finally as there is obviously lots of opportunity for us to continue to be flexible in how we work specifically which is where Satya talked about. But this is a pretty broad conversation and in many ways I think talks to a broader rethink of what productivity means across every industry and every role which I actually think is a very exciting time both for Microsoft 365 and lots of the tools we are developing. Mark Murphy: Thank you. Michael Spencer: Thanks Mark. Operator we will take the next question, please. Operator: Thank you. Our next question comes from the line of Walter Pritchard with Citibank. Please proceed with your question. Walter Pritchard: Hi, thank you. Question for Satya and how you're thinking about the $200 billion enterprise applications market? Your market share on that areas is fairly low in aggregate. You've got Dynamics that's performing really well and sounds like is accelerating. Just wondering how you're looking at that market more broadly as an opportunity for the company? Satya Nadella: Yes. We are very-very focused on what we think is modern business process applications Walter. The way I look at it is there's a complete rethink on even if you take the previous conversation around what are the workflows that need to get integrated into a communications tools such that there is real continuity between frontlines to knowledge worker to business process. I think that opens up even a ton of opportunity. I mean take something like even digital twins and the level of automation that one can bring even into manufacturing. So the combination of an Azure pass service to SaaS capabilities in Dynamics 365 can be very transformative to digital manufacturing which is probably going to be one of the bigger trends going forward. Same thing in supply chain. So it's a pretty important area for us, business process and business applications participation if you will, will be both on the Azure side, on the data side, on the AI side and the biz apps side as well as Power apps. So it's not one narrow category because I think most people the way you measure business applications and the categories of business and applications is pretty narrow but business process is much broader than that and so that's I think at least what we are building towards. Amy Hood: And maybe just to add a bit to that Satya just I think for us one of the exciting parts about dynamics and for shareholders is the expansiveness of that redefinition by industry and even the terms and categorization today that define biz apps I think we'll see are quite large and will be addressed not just with our dynamics product portfolio but partially with our LinkedIn portfolio, with our Power platform portfolio, with Microsoft 365 as well as Azure and I think that and thinking about it holistically is why it's so important for us and why we keep coming back to the commercial cloud as our frame. It's how customers see the solution. It's how we sell. It's how solutions are actually implemented for business process change. Michael Spencer: Great. Thanks Walter. Operator we will take next question. Please. Operator: Thank you. Our next question comes from the line of Raimo Lenschow with Barclays. Please proceed with your question. Raimo Lenschow: Thank you and congrats from me as well. I wanted to talk a little bit about Gaming. Obviously you had a very strong quarter but we also saw a few months ago the launch of Xbox Game Pass Ultimate so all the Xbox as we knew it can you talk a little bit about some of the early experiences there and the importance that you see emerging for that? Thank you. Satya Nadella: Yes. Maybe I'll start Amy you can add to this. On Xcloud it's very early days but we are very excited about fundamentally the expansion opportunity it provides. So the service today really allows us to take our catalog and not be limited to any of the traditional endpoints in particular the console and the PC and expand beyond that and so as you can imagine that I think from a reach perspective is very exciting to us and the fact that we now have a technology solution to do so we are in the very early innings of it while at the same time ensuring that we are doing a fantastic job for all our console gamers and PC gamers is going to be how we'll approach the value of our subscriptions. Raimo Lenschow: Thank you. Michael Spencer: Thanks Raimo. Operator we'll take the last question please. Operator: Thank you. Our final question comes from the line of Brad Reback with Stifel. Please proceed with your question. Brad Reback: Great. Thanks very much. Amy, the cash flow in the quarter the audit settlement was far ahead of everyone's expectations and I know you talked about strong billings in the quarter but as we look forward are there any puts and takes that we should be aware of or should we just focus on cash flow growing pretty much in line with net income? Thanks. Amy Hood: Yes, in general Brad it's a very good question because the things you tend to watch that can move it quarter to quarter or things like you've mentioned whether it's the settlement this quarter, whether it's for free cash flow, the timing of cash capital expenditures versus on an accrual basis but overall it really should move in line with operating income generally and really reflect the fundamentals of our business execution. It's been something we focused on and I do feel like strong sales improving margins especially in the cloud have all benefited us on those lines. Brad Reback: Great. Thanks very much. Michael Spencer: Thanks Brad. That wraps up the Q&A portion of today's earnings call. Thank you for joining us today and we look forward to speaking with all of you very soon. Amy Hood: Thank you all and stay safe. Satya Nadella: Thank you very much. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
UBS Lifts Microsoft Price Target, Shares Up 1%
UBS analysts raised Microsoft (NASDAQ:MSFT) price target to $525, up from $500, while maintaining a Buy rating, reflecting optimism around the tech giant’s long-term prospects despite some near-term challenges in Azure and AI segments. Currently, the company’s shares are up around 1% in pre-market.
The adjustment to the price target comes with nuanced insights. The analysts noted that while new capacity for Azure is expected to come online in the second half of the fiscal year, growth acceleration may be back-loaded. As a result, UBS trimmed its forecast for Azure’s constant currency growth in Q3 to 34%, down slightly from 35.6%.
Microsoft’s position as a leader in AI and cloud computing remains a key strength, despite concerns over pricing trends. The analysts highlighted that Azure OpenAI API prices are decreasing, potentially impacting revenue in the AI segment. Additionally, speculation about an eventual end to Microsoft’s exclusivity agreement with OpenAI could influence future dynamics but might also open new opportunities.
In the enterprise software arena, more frequent reports of discounts on M365 Copilot pricing suggest competitive pressures, although Microsoft’s premium positioning continues to provide resilience.
Microsoft Stock Drops 5% After Strong Q1 Results Amid Softer Azure Guidance
Microsoft (NASDAQ:MSFT) reported fiscal first-quarter results that exceeded Wall Street expectations, driven by solid performance in its cloud segment, Azure. However, shares dropped over 5% intra-day on Thursday due to softer guidance for Azure growth in the upcoming quarter.
For Q1, Microsoft posted earnings per share of $3.30 on $40.59 billion in revenue, compared to the Street forecasts of $5.21 EPS on $40.18 billion in revenue. Azure saw a 33% growth, slightly above the expected 32%, but CFO Amy Hood indicated a projected slowdown in Azure’s growth to between 31% and 32% for Q2, which weighed on investor sentiment.
AI services played a key role in Azure’s growth, contributing 12 percentage points, compared to 11 points last quarter, adding an estimated $1.5 billion in quarterly revenue, according to RBC Capital Markets. However, high capital expenditures, totaling $20 billion, added to concerns.
Barclays analysts expressed caution over near-term growth prospects, noting that AI capacity constraints could limit Azure’s growth acceleration. They suggested that while re-acceleration may materialize in the second half of the fiscal year, the real impact will only be evident with Q3 results in April 2025, creating limited near-term excitement for investors.
Microsoft Corporation's Strong Fiscal First-Quarter Earnings
- Microsoft Corporation (NASDAQ:MSFT) reported earnings per share of $3.30, surpassing the estimated $3.10, and actual revenue of approximately $65.6 billion, exceeding the estimated $64.6 billion.
- The company's profit of $3.30 per share exceeded the Zacks Consensus Estimate, marking an increase from the $2.99 per share reported in the same quarter last year, driven by a 21% growth in constant revenue within its cloud business.
- Microsoft's strategic focus on artificial intelligence and cloud computing is reflected in its financial metrics, with a price-to-earnings (P/E) ratio of approximately 36.48 and a price-to-sales ratio of about 13.12.
Microsoft Corporation, trading on the NASDAQ under the symbol MSFT, is a leading technology company known for its software products, cloud services, and hardware. The company competes with other tech giants like Apple, Google, and Amazon. On October 30, 2024, Microsoft reported earnings per share of $3.30, surpassing the estimated $3.10, and actual revenue of approximately $65.6 billion, exceeding the estimated $64.6 billion.
The company's fiscal first-quarter earnings exceeded analysts' expectations, as highlighted by Zacks. Microsoft reported a profit of $3.30 per share, surpassing the Zacks Consensus Estimate of $3.08 per share. This marks an increase from the $2.99 per share reported in the same quarter last year. The strong performance is driven by a 21% growth in constant revenue within its cloud business, largely due to the increasing demand for AI solutions.
Microsoft's strategic focus on artificial intelligence and cloud computing is evident in its financial metrics. The company has a price-to-earnings (P/E) ratio of approximately 36.48, indicating the price investors are willing to pay for each dollar of earnings. Its price-to-sales ratio stands at about 13.12, reflecting the market's valuation of its revenue. The enterprise value to sales ratio is around 13.44, suggesting how the market values the company relative to its sales, including debt and excluding cash.
The company's financial health is further supported by its debt-to-equity ratio of approximately 0.21, indicating a relatively low level of debt compared to equity. Microsoft's current ratio is about 1.27, showing a good level of liquidity to cover its short-term liabilities. The enterprise value to operating cash flow ratio is approximately 27.80, highlighting the company's valuation in relation to its cash flow from operations. These metrics underscore Microsoft's strong financial position and its ability to invest in growth areas like AI and cloud computing.
Microsoft Faces Potential EPS Pressure, Downgraded to Perform by Oppenheimer
Oppenheimer analysts downgraded Microsoft (NASDAQ:MSFT) to Perform from Outperform, citing concerns over overly optimistic revenue and earnings projections. The analysts emphasized that OpenAI’s anticipated losses, projected between $2-3 billion for 2025, were not initially factored into previous estimates. As enterprises remain cautious in adopting AI technology, related revenues are expected to underperform, further impacting Microsoft’s bottom line.
Additional challenges include increased CapEx, which could drive up depreciation costs, along with reduced interest income and higher operational expenses to support AI advancements. Given Microsoft's strategic focus on long-term innovation rather than short-term margin growth, the analysts suggest that expanding profitability may take a backseat for now. With the company’s shares currently trading around the midpoint of its historical 25x-35x P/E range, the analysts believe they may trend toward the lower end, particularly as the company faces slower-than-anticipated AI adoption and potential revenue shortfalls.
Microsoft Approves $60B Share Buyback and Boosts Dividend
Microsoft Corporation (NASDAQ:MSFT) announced that its board has authorized a new share buyback program valued at up to $60 billion, while also increasing its quarterly dividend. The tech giant declared a quarterly dividend of $0.83 per share, marking a 10% increase from the previous quarter.
In July, Microsoft reported strong quarterly earnings, though these were tempered by a significant rise in capital expenditures as the company ramps up investments in artificial intelligence (AI). Revenue from its Azure cloud division, which plays a crucial role in the company’s AI initiatives, experienced a slowdown during the quarter. However, Microsoft expects growth in this segment to accelerate by late 2025.
The company, along with other major tech firms, is in a race to demonstrate the value of the billions of dollars invested in AI over the past year. Thus far, most tech peers have yet to see significant returns on these investments. Additionally, Microsoft confirmed that its annual shareholders meeting will take place on December 10.
Microsoft Shares Fall on Slower Cloud Revenue Growth Despite Q4 Earnings Beat
Microsoft Corporation (NASDAQ:MSFT) shares dipped 1% on Wednesday following the release of its fourth-quarter earnings report, which revealed cloud revenue growth falling short of Wall Street's expectations despite increased investment spending aimed at boosting growth.
Microsoft reported earnings per share of $2.95 on revenue of $64.7 billion, compared to the analyst consensus of $2.94 and $64.38 billion, respectively.
Azure, Microsoft's cloud division, posted a 29% growth rate, falling short of the anticipated 30.2% and marking a deceleration from the 31% growth reported in the third quarter. Azure's performance is closely watched as an indicator of AI demand, with AI-driven growth contributing 8% to Azure's overall growth, up from 7% in the previous quarter.
Despite the slower cloud growth, Microsoft increased its capital expenditures to $19 billion in Q4, up from $14 billion in Q3 and nearly double the $10.7 billion spent in Q4 of the previous year.
On a positive note, Microsoft's commercial bookings surged 17% year-over-year, significantly exceeding expectations. However, the overall sentiment was dampened by concerns over the slowdown in cloud revenue growth.
Microsoft (NASDAQ:MSFT) Fiscal Fourth-Quarter 2024 Earnings Preview
- Microsoft's fiscal fourth-quarter revenue is forecasted to hit $64.37 billion, marking a 14.6% increase year-over-year, with significant contributions expected from its Azure cloud platform.
- The company's valuation metrics, including a price-to-earnings (P/E) ratio of approximately 42.63 and a price-to-sales (P/S) ratio of about 13.14, reflect high investor expectations driven by growth in cloud computing and AI.
- Microsoft's strategic investments in AI and its diversified business model, blending innovation with traditional revenue streams like Windows and Office, position it for long-term success in the tech industry.
As Microsoft (NASDAQ:MSFT) gears up to release its fiscal fourth-quarter 2024 results on July 30, the tech giant is under the spotlight, especially for its strides in cloud computing and artificial intelligence (AI). With a commendable year-to-date stock increase of over 15%, the market is keenly awaiting the earnings report. Analysts have set the bar high, forecasting a fourth-quarter revenue of $64.37 billion, which would be a 14.6% jump from the previous year, and an earnings per share (EPS) growth of 9% to $2.93. The Azure public cloud platform, a key component of Microsoft's intelligent cloud segment, is expected to play a pivotal role in this growth, with its revenue projected to surge by 19.5%. Azure's expanding footprint in the global cloud infrastructure market, now holding a 25% share, is directly challenging Amazon Web Services (AWS), underscoring Microsoft's competitive edge in the cloud domain.
Microsoft's valuation metrics, as highlighted by its price-to-earnings (P/E) ratio of approximately 42.63 on a trailing twelve-month basis, underscore the high expectations investors have from the company. This valuation reflects not just past performance but also the anticipated growth, particularly from high-growth sectors like cloud computing and AI. The price-to-sales (P/S) ratio of about 13.14 and the enterprise value to sales (EV/Sales) ratio of roughly 13.18 further illustrate the premium investors are willing to pay for Microsoft's sales, driven by its strong market position and innovative product offerings. These financial ratios highlight the company's robust valuation in the market, setting a high benchmark for its upcoming earnings report.
The anticipation around Microsoft's fiscal fourth-quarter results is not just about the numbers but also about the strategic areas driving its growth. The company's early investments in OpenAI have positioned it as a leader in the generative AI space, enhancing its product offerings across Azure, Office, and Windows. This strategic focus is expected to significantly contribute to the company's growth in the fourth quarter, aligning with the increased capital expenditures aimed at meeting the surging demand for AI. The integration of AI capabilities across Microsoft's product range is a testament to the company's commitment to innovation and growth, particularly in high-demand sectors.
Despite the spotlight on Azure and AI, Microsoft's traditional core businesses, including Windows and Office, continue to be significant revenue generators. The transition to subscription-based licensing and the Microsoft 365 bundle have not only enhanced the profitability of these legacy franchises but also demonstrated their enduring value in Microsoft's portfolio. The Office 365 Commercial segment's 15% revenue growth and Dynamics 365 cloud revenue's 23% increase are indicative of the strong performance of Microsoft's diversified business model. This blend of innovation in high-growth areas with the steady performance of traditional segments underscores Microsoft's strategic positioning ahead of its fiscal fourth-quarter 2024 earnings release.
Microsoft's comprehensive portfolio, spanning Azure, Windows, Office, and AI capabilities, solidifies its status as a formidable player in the tech industry. With a strong balance sheet, exceptional margins, and a strategic focus on growth markets, Microsoft is well-positioned for long-term success. As the company approaches its earnings report, its financial health, as indicated by a debt-to-equity (D/E) ratio of about 0.28 and a current ratio of approximately 1.24, reflects its ability to manage liabilities and sustain growth. These financial indicators, combined with the anticipated growth in high-demand sectors, make Microsoft a compelling entity in the tech landscape, poised for continued market outperformance.
