Microsoft Corporation (MSFT) on Q3 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to the Microsoft Fiscal Year 2021 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brett Iversen, General Manager, Investor Relations. Thank you. You may begin. Brett Iversen: 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, Brett. It was a record quarter powered by our continued strength of our commercial cloud. Over a year into the pandemic, digital adoption curves aren't slowing down. In fact, they're accelerating and it's just the beginning. Digital technology will be the foundation for resilience and growth over the next decade. We are innovating and building the cloud stack to accelerate the digital capability of every organization on the planet. Amy Hood: Thank you, Satya and good afternoon everyone. My comments today reflect the impact of the ZeniMax acquisition for approximately three weeks this quarter as well as our outlook. There is no impact from the Nuance acquisition that is expected to close by the end of the calendar year. Our third quarter revenue was $41.7 billion, up 19% and 16% in constant currency and earnings per share was $1.95 and increased 39% and 34% in constant currency when adjusted for the tax benefit related to the recent India Supreme Court decision on withholding taxes. Many trends across industries, customer segments, and geographical markets continued to improve, which coupled with strong execution by our sales and partner teams, drove another quarter of double-digit top and bottom-line growth. In our commercial business accelerating digital transformation enabled by our unique Microsoft Cloud value, drove healthy demand for our hybrid and cloud offerings. Strong Azure consumption, increased platform commitments, and higher usage of Teams Power Platform and our security offerings were key beneficiaries. Within our small and medium business customer segment, continued improvement in cloud purchasing trends more than offset transactional licensing weakness. And in LinkedIn's Talent Solutions business, annual contracts and job postings improved with the job market. In our consumer business, Windows OEM and Microsoft 365 consumer subscriptions benefited from a much stronger than expected PC market despite significant ongoing constraints in the supply chain. Improvement in the advertising market again benefited our Search and LinkedIn businesses and in gaming, we continue to see record engagement and strong monetization across our platform as well as demand that significantly exceeded supply for Xbox Series X and S consoles. Moving to our overall results, commercial bookings growth was ahead of expectations increasing 39% and 38% in constant currency on a growing expiration base and low prior year comparable. Growth was driven by consistent execution across our core annuity sales motions and an increase in the number of larger long-term Azure contracts. As a result, commercial remaining performance obligation increased 31% and 32% in constant currency to $117 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 two points year-over-year to 94%. Commercial cloud revenue also better than expected grew 33% and 29% in constant currency to $17.7 billion. Commercial cloud gross margin percentage expanded three points year-over-year to 70%, driven by the change in accounting estimate for the useful life of server and network equipment assets. Excluding this impact, commercial cloud gross margin percentage was up slightly with improvement in Azure gross margin mostly offset by sales mix shift to Azure. With a weaker US dollar, FX increased revenue growth by approximately three points about one point more favorable than anticipated. FX increased COGS and operating expense growth by approximately two points, both in line with expectations. Gross margin dollars increased 19% and 16% in constant currency. Gross margin percentage was 69% relatively unchanged year-over-year with roughly one point of favorable impact from the change in accounting estimate noted earlier. Excluding this impact, company gross margin percentage was down, driven by strong revenue growth in cloud and gaming that resulted in sales mix shift. Operating expense increased 5% and 3% in constant currency, lower than anticipated, primarily driven by investments that shifted to future quarters. Overall, company headcount grew again this quarter up 12% year-over-year, reflecting our focused investments across key areas like cloud engineering, sales, and customer deployment. Year-over-year growth in operating expense includes roughly two points of impact from continued COVID-related savings. Operating income increased 31% and 27% in constant currency and operating margins expanded four points year-over-year to 41% including nearly two points of favorable impact from the change in accounting estimate and roughly one point of favorable impact from COVID-related savings. Now to our segment results. Revenue from productivity and business processes was $13.6 billion and grew 15% and 12% in constant currency, primarily driven by Office 365 and LinkedIn. Office Commercial revenue grew 14% and 10% in constant currency. Office 365 Commercial revenue grew 22% and 19% in constant currency, again driven by installed base expansion across all workloads and customer segments as well as higher ARPU. Demand for our high-value security, compliance and voice offerings drove strong momentum in E5 again this quarter. Paid Office 365 commercial seats grew 15% year-over-year to nearly $300 million with acceleration to the cloud in our small and medium business segment and a recovery in growth in our first-line worker offerings. The accelerated cloud adoption, negatively impacted Office Commercial licensing, which declined 25% and 27% in constant currency, a bit below expectations. In Office Consumer, revenue grew 5% and 2% in constant currency, slightly below expectations, primarily due to transactional weakness in Japan. Microsoft 365 consumer subscriptions grew to $50.2 million, up 27% year-over-year. Dynamics revenue grew 26% and 22% in constant currency, better than expected, driven by Dynamics 365 revenue growth accelerating to 45% and 40% in constant currency with particular strength in Power Apps in our finance and operations offering. LinkedIn revenue increased 25% and 23% in constant currency, ahead of expectations. Our Marketing Solutions business accelerated again this quarter to 64% revenue growth. Segment gross margin dollars increased 15% and 12% in constant currency and gross margin percentage was relatively unchanged year-over-year with nearly 2 points of favorable impact from the change in accounting estimate. Operating expense increased 4% and 2% in constant currency and operating income increased 26% and 20% in constant currency including 4 points due to the change in accounting estimate. Next, the Intelligent Cloud segment. Revenue was $15.1 billion, ahead of expectations, increasing 23% and 20% in constant currency. Server products and cloud services revenue increased 26% and 23% in constant currency, ahead of expectations. Azure revenue grew 50% and 46% in constant currency, better than anticipated, driven by continued strength in our consumption-based business. And in our per user business growth in our Enterprise Mobility and Security installed base accelerated again this quarter, up 30% to over 174 million seats. And on a strong prior year comparable that benefited from the end of support for Windows Server 2008, our on-premise's server business increased 3% and was relatively unchanged in constant currency with strong annuity performance, driven by continued customer preference for our hybrid and premium offerings. Enterprise Services revenue grew 10% and 8% in constant currency with better-than-expected performance in Microsoft Consulting Services. Segment gross margin dollars increased 27% to 24% in constant currency. Gross margin percentage increased 2 points year-over-year with roughly 2 points of favorable impact from the change in accounting estimate. Operating expense increased 12% and 10% in constant currency and operating income grew 41% and 36% in constant currency with roughly 7 points of favorable impact from the change in accounting estimate. Now to More Personal Computing. Revenue was $13 billion increasing 19% and 16% in constant currency with better-than-expected performance in gaming, Windows OEM and Search. In Windows, the stronger PC market resulted in overall OEM revenue growth of 10%, driven by continued customer demand. OEM non-Pro revenue grew 44% and OEM Pro revenue declined 2% on a prior year comparable that included the end of support for Windows 7. Windows commercial products and cloud services grew 10% and 7% in constant currency with a lower-than-expected mix of in-quarter recognition from multiyear agreements. In Surface, revenue grew 12% and 7% in constant currency lower than expected, primarily due to execution challenges in the commercial segment. Search revenue ex TAC increased 17% and 14% in constant currency benefiting from the improved advertising market noted earlier. And in Gaming, revenue increased 50% and 48% in constant currency. Xbox hardware revenue grew 232% and 223% in constant currency driven by our new consoles. Xbox content and services revenue, which now includes ZeniMax grew 34% and 32% in constant currency with better-than-expected performance of first-party titles, particularly Minecraft. Segment gross margin dollars increased 14% and 11% in constant currency. Gross margin percentage decreased two points year-over-year driven by sales mix shift to gaming. Operating expense decreased 3% and 4% in constant currency and operating income grew 27% and 22% in constant currency. Now back to total company results. Capital expenditures including finance leases were $6 billion in line with expectations driven by ongoing investment to support growing global demand from increased customer usage of our cloud services. Cash paid for PP&E was $5.1 billion. Cash flow from operations was $22.2 billion and increased 27% year-over-year driven by strong cloud billings and collections. Free cash flow was $17.1 billion, up 24%. Other income and expense was $188 million higher than anticipated, primarily driven by net gains on investments. As a reminder, we are required to recognize mark-to-market gains or losses on our equity portfolio. Our non-GAAP effective tax rate was approximately 14%. And finally, we returned $10 billion to shareholders through share repurchases and dividends. Now let's move to the outlook. As a reminder in Q4, we begin to see growth rates that reflect the first full quarter impact of COVID-19 a year ago both across revenue and operating expenses. Last year across Windows, OEM, Gaming and Surface we saw surges in purchasing and usage that will negatively impact Q4 growth rates. In our Search and LinkedIn businesses, Q4 growth rates will be positively impacted given the advertising and job markets a year ago. And in our transactional business, the slowdown in purchasing in Office and Server last year will benefit Q4 growth rates, particularly in our small and medium business segment. Next in our largest quarter of the year, we expect the accelerating trends Satya discussed, our differentiated market position and continued solid execution to results in another strong quarter. Growth in commercial bookings should again be healthy, but impacted by a declining expiry base. As always, an increasing mix of larger long-term Azure contracts, which are more unpredictable in their timing can drive quarterly volatility in bookings. Commercial cloud gross margin percentage should increase roughly four points year-over-year with less than two points from the change in accounting estimate. As a reminder, the favorable impact continues to lessen over time. Excluding the accounting change, Q4 gross margin percentage will also benefit a bit from investments we made a year ago to support increased usage needs in remote work scenarios. Longer term commercial cloud gross margin percentage will continue to be impacted by revenue mix shift to Azure, increased usage of our productivity and collab solutions and ongoing strategic investments to support our customers' success. In capital expenditures, we expect a sequential increase on a dollar basis 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 Productivity and Business Processes and Intelligent Cloud revenue growth by approximately three points, More Personal Computing revenue and total operating expense growth by approximately two points and COGS growth by approximately one point. Next to our segment guidance. In Productivity and Business Processes, we expect revenue between $13.8 billion and $14.05 billion. In Office Commercial, revenue growth will again be driven by Office 365 with healthy seat growth and upsell opportunity to E5. In our on-premises business, we expect revenue to decline in the high teens consistent with the ongoing customer shift to the cloud. In Office consumer, we expect mid to high teens revenue growth driven by continued momentum in Microsoft 365 consumer subscriptions against the low prior year comparable impacted by the transactional purchasing weakness noted earlier. In LinkedIn, we expect revenue growth in the mid-30% range, driven by continued strong engagement on the platform and improvements in the advertising and job markets. And in Dynamics, continued momentum in Dynamics 365 will drive revenue growth similar to last quarter. For Intelligent Cloud, we expect revenue between $16.2 billion and $16.45 billion. In Azure, revenue will again be driven by strong growth in our consumption-based business. And our per user business should continue to benefit from Microsoft 365 suite momentum, though we expect some moderation in growth rates given the size of the installed base. In our on-premises server business, we expect revenue growth in the mid-single digits, driven by continued demand for our hybrid and premium annuity offerings against a low prior year comparable and the transactional purchasing noted earlier. And in Enterprise Services, revenue growth to be roughly in line with last quarter. In More Personal Computing, we expect revenue between $13.6 billion and $14 billion. In Windows, overall revenue should grow mid-single digits driven by Windows Commercial products and cloud services growth and continued demand for PCs, partially offset by ongoing supply chain impacts and the comparable noted earlier. In Surface on a strong prior year comparable, we expect revenue to decline in the mid-teens as we work through the supply chain and executing challenges noted earlier. In Search ex TAC, we expect revenue growth in the mid-40s driven by improvements in the advertising market. In gaming, we expect revenue growth in the mid- to high single-digits. Significant demand for the Xbox Series X and S will continue to be constrained by supply. And on the strong prior year comparable, we expect Xbox content and services revenue to decline in the mid- to high single-digits. Now back to company guidance. We expect COGS of $13.7 billion to $13.9 billion and operating expense of $13.1 billion to $13.2 billion. As a reminder, in operating expense in Q4, we will benefit from continued COVID-related savings as well as the prior year comparable, which included roughly four points of impact from a $450 million charge related to the realignment of our retail store strategy. In other income and expense, interest income and expense should offset each other. And finally, we expect our Q4 effective tax rate to be approximately 16%. Now I'd like to share some closing thoughts as we look to next fiscal year. Overall, we have performed well through three quarters of our fiscal year in a challenging environment, and we fully expect a strong Q4 to lay the foundation for FY 2022. We will, of course, continue to focus on delivering strong revenue growth in the short term. But even more importantly, this year has reinforced the critical importance of investing boldly to capture the significant list of opportunities ahead of us. Excellence in daily execution, coupled with a thoughtful vision for the future that creates value as well as opportunity for our customers globally will lead to long-term revenue and profit growth. With that, Brett, let's go to Q&A. Brett Iversen: Thanks, Amy. We'll now move to Q&A. Out of respect for others on the call, we request that participants please only ask one question. Operator, can you please repeat the instructions? Operator: Absolutely. Our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed with your question. Keith Weiss: Excellent. Thank you, guys, for taking the question and great quarter. I guess this is a question both for Satya and Amy. We're seeing these really great commercial bookings results come through 39% growth in the current quarter. And Satya, you've been talking to us a lot about these more strategic deals and the acceleration of digital transformation. Can you give us a little bit of color of what comes in these more strategic deals? How does it change the dynamics of what types of solutions people are using for Microsoft, the scope of sort of how deeply you're getting into these customers and sort of how much of the IT budget you're getting? And then maybe talk to us a little bit about the timeframe for which this comes into revenues. What should our expectation be when you get one of these big strategic deals? How long does it take to really ramp up this customer onto the broader Microsoft platform? Satya Nadella: Thank you, Keith, for the question. I think we feel very good both, I would say, of consumption and usage today, as well as, as you mentioned, the bookings because both of those at any given point in time is what we look at. The overall approach to the Microsoft Cloud, if you look at the breadth of what any customer may be doing with us, they may be doing hybrid cloud infrastructure with us. They may be, for the first time, doing Tier 1 workloads on the cloud with us, right, whether it's in core financials or in retail or in health care. Also they could be deploying their centers of excellence around Power Platform. And Power Platform sits at the intersection of pretty much Dynamics, Azure and Teams, for example. And of course, we're seeing the growth of Teams and Teams, as I've always maintained, is not just about one thing. It's not about just meetings or it's not about just chat. But most importantly, it's a platform that drives in fact line of business and business application termination inside of a collaboration workflow. And so that's what we're seeing. And then the other thing I would say that we are now seeing is also that industry level differentiation of the all-up Microsoft cloud. So whether it's in retail, whether it's in healthcare or in financial services, we feel that we now can bring the power of the entire cloud together in a much more strategic way. Amy Hood: And maybe just to build on what Satya was saying, Keith, if you think about bookings or the remaining performance obligation, what I tend to think of is, when you hear those words, I think, often we pivot toward these Azure contracts we talk a lot about because they create some volatility. But really, the foundation for these long-term strategic contracts is the Microsoft Cloud holistically. So what you'll see is not just Office 365, but the suite of Microsoft 365. You'll see higher-level additions of security or compliance workloads. You'll see Dynamics 365 as a pillar with Power Platform, because they're spanning end-to-end industry solutions to combine it back to what Satya is saying. So you see it add a good bookings number, which is fundamentally about, do you renew what's up for renewal, do you add workloads, do you add users and do you -- and does it have a component of an Azure commitment. All of those things together are what creates this change. And if you look at remaining performance obligation, you see there a good bit of it, that's going to be recognized in the next 12 months and another equally balanced portion that's beyond that. So it's not all long-term. This transition happens quickly, usage builds, it's both per user, it's also for workload and it's consumptive based. So it's really a more holistic view that I would have people take as opposed to thinking about an Azure contract as long dated. Keith Weiss: Okay, Amy. Thank you, guys. Brett Iversen: Operator, next question, please? Operator: Thank you. The next question is from the line of Brent Thill with Jefferies. Please proceed with your question. Brent Thill: Thanks. Satya, on healthcare, if you could just frame your aspirations long-term, where you'd like to be in this industry? And if you could just comment on where you still think the lowest hanging fruit is as it relates to the opportunity set, specifically building on the Nuance acquisition? Satya Nadella: Sure, Brent. Thanks for the question. When I look at the industry cloud opportunities, we think of healthcare is a very critical opportunity for us and a huge and expansive addressable market. If you think about as a percentage of GDP, obviously, healthcare is significant. And fundamentally, when I think about the provider market, in particular, digital tech is going to play a huge role for every provider to do the things that they care the most about, which is improve the patient outcomes and reduce cost and reduce the burden on the physicians. So that's where the Nuance acquisition is a great fit for us. We've been partnered with them. It also enhances our platform approach, Brent. What we have always done has gone into an industry with a platform and an ecosystem approach. For example, with Nuance, they've done a fantastic job of taking what's perhaps the most defining technology of our times, which is AI and applying it to healthcare, which is the most important application space. And they've done that again by really partnering, partnering deeply with EMR systems and the rest of the healthcare ecosystem ultimately to benefit the providers. And so we're really looking forward to that acquisition closing and we're already partnered with them in our cloud. But this allows us to take that and integrate more deeply with what we're doing with Teams and some of our AI capabilities even more deeply. And we think we can add a significant amount of value both to our partners in the healthcare ecosystem as well as most importantly to the providers. Brent Thill: Thank you. Brett Iversen: Thanks, Brent. Operator, next question please. Operator: Thank you. Our next question is from Mark Moerdler with Bernstein Research. Please proceed with your question. Mark Moerdler: Thank you very much and again congratulations on the quarter and how well the company is executing. I'd like to change gear a little bit and drill in a bit on the Dynamics 365 business. Frankly, was this part of any other company or even a standalone business, it would be such a center of enthusiasm by investors given how fast it's grown. Satya, when you said Dynamics 365 is taking share from competitors, are you talking about ERP or CRM or is it both? Or is it something different? And what are the key drivers of that strength and growth? And how sustainable do you believe that is? Thank you. Satya Nadella: Thanks so much for the question, Mark. And first of all, we're very, very excited about what's happening again with Dynamics 365. And when you ask where is the share coming and where is the growth coming? It's coming from all those categories. But the most interesting thing is, as somebody wants to deploy even an omni-channel solution, for example, in a world where what's physical and what is digital need to come together, unlike anything before because the pandemic is bringing about such structural change. You need both, that federated inventory management, distributed inventory management system I referenced in my remarks. And you need the customer insights product that is probably one of the fastest-growing modules, which is that 360-degree view on customers and customer engagement and then including the supply chain. So bottom line is that, every customer is looking to digitize and bring together the data silos, in fact, silos of CRM and ERP systems. And that's probably one of the most interesting things we have observed is, it's not about replacing even an existing ERP or an existing CRM, it's about buying Dynamics and helping them bridge even some of the disparate CRM and ERP systems they may have. So we do see this, as a huge opportunity as the world modernizes and puts in a complete next-generation, more proactive versus reactive business systems. And that's what Dynamics has been architected for. So I feel like coming out of this pandemic and the architecture and all the hard work that team has done over the multiple years now, positions us very well. Mark Moerdler: Thank you. I much appreciate it. Brett Iversen: Thanks Mark. Operator, next question please. Operator: Thank you. The next question is from Karl Keirstead with UBS. Please proceed with your question. Karl Keirstead: Thanks. Question for Amy on OpEx. Amy the OpEx growth has been extraordinarily low the last several quarters. The growth rate looks like it's going to inch up a little bit in the June quarter. But you mentioned the investments are shifting to future quarters. You probably don't want to give too much on fiscal 2022. But I'm just wondering whether we should extrapolate that into thinking that OpEx growth in fiscal 2022 should get back to the pre-COVID levels of plus 10%. And if you don't want to be that specific, maybe you could just help us outline some of the variables we should keep in mind as we model that line item post-COVID recovery in fiscal 2022? Thank you. Amy Hood: Thanks Karl. And I do think in Q4, and its why, I specifically called out the four points of impact from a year ago because it does start to get to a more normalized rate in Q4. And I say that, because our headcount growth which I noted earlier has been 12%. And so, overall, you would expect, OpEx growth to at least marry your headcount growth over any period of time and we've certainly benefited through the year from COVID-related savings. We'll continue to have that in Q4. And as we get to 2022, I would expect to see a little less of that as people get back to the workplace at some level and resume some other normal levels of activity. And so, I do think, you're heading in the right direction on that. And listen, I think that type of growth with the type of opportunity we're seeing, the number of TAM expansive opportunities really Satya went through in his comments, where we feel like we've got a unique position and opportunity to take share. I feel pretty confident in being able to certainly land that OpEx growth number. Karl Keirstead: Got it. Thank you, Amy. Brett Iversen: Thanks, Karl. Satya Nadella: I mean, I think just to add to it, Amy, I think I hope in all of your models you have new rows at least when we think about it from even just last year to this year, we are in many more new categories and in those categories with significant differentiation. So when we think about OpEx, it's not about adding OpEx to the stuff that we had in the past. It's -- there's leverage there. In fact it's OpEx going into new TAMs. Brett Iversen : Operator, next question please. Operator: Absolutely. Our next question comes from the line of Kirk Materne with Evercore ISI. Please proceed with your question. Kirk Materne: Yes. Thanks very much and congrats on the quarter. Satya, I was wondering if you could just talk a little bit more about Viva. I realize it's early days on that. But just the kind of feedback you're getting on that product? And how do you see that sort of fitting in? There seem to be some nice adjacencies with Dynamics with Office 365. So I was just kind of curious if you could give us a little bit of a hand on how it's going and sort of your excitement level about it over the next quarter next couple of years? Thanks. Satya Nadella: Thank you so much for the question. It's speaks a lot. It's very much a great example of what I was saying in terms of creating a new category right. When I look back multiple years now, we started talking about Power Platform. And as I said even in my script today, we now have a full suite of tools that essentially created this next-generation business, process automation and productivity suite in Power Platform that set scale and growing at scale. Similarly, we think of the experience cloud as a distinct cloud opportunity for us. It brings together even today what have been disparate tools, whether it's the knowledge mining and management systems in an enterprise, connecting it to learnings and ultimately the employee experience and communication system. So we -- it obviously is a very massive adjacencies to what we're doing with Microsoft 365 and Office 365 in particular Teams. But also to your point connects up with line of business systems, HRM systems and all of the other things we do in Dynamics as well as other third-party SaaS applications. So it's very early days. And so we'll take the same approach we have taken, whether it's in Security, whether it's in Power Platform, whether it's Dynamics and many other places where you've seen us grow substantial new businesses essentially as part of Microsoft Cloud. But we're very excited about what this opportunity represents. Kirk Materne: Thank you. Brett Iversen : Thanks, Kirk. Operator, next question please. Operator: Absolutely. Our next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed with your question. Kash Rangan: Hi. Thank you very much. Congratulations on the quarter. Satya, I know, you've said that you expect tech as a percentage of GDP to track about 5% or roughly double over the next 10 years or so. How should we think about Microsoft's share in that context? Is it going to be steady? Or do you see that expanding? And if it is going to expand, what are the key products and markets that will drive your relative share growth as you outperform tech and as tech outperforms GDP. Thank you so much. Satya Nadella: No, thanks Kash for the question. I think that, first of all, we are big believers in two things. One is, we need to be competitive in each layer and then the coming together of each layer into a cohesive coherent architecture of the full stack or the Microsoft cloud creates that differentiation. And that will define what we think is going to be increasing share for us, as tech itself as a percentage of GDP doubles. So if you look at it -- whether it's on the hybrid infrastructure or the multi-cloud, multi-edge world, which I believe is going to be the world 10 years from now, we are very well positioned. We have led in it we currently lead in it and we plan to continue that. When it comes to data when I look at even what we've been able to do with Synapse even in the just last year and what that can do both at the cloud and the edge. When it comes to AI what we are doing with OpenAI and our cognitive services or what we're doing with Power Platform. Developer SaaS one of the most exciting things again, that I believe is the next 10 years is going to be about developers and the digital capability in every enterprise and we are the leaders there. When you think about VS Code as well as GitHub. And then, of course, all of the things that we're doing with Microsoft 365 and Dynamics on the industry side. So, ultimately, we don't take anything for granted. But that said, we're well positioned for what is expansive TAM and with competitive differentiation both in the individual layers of the stack as well as the cohesiveness of the stack itself. Kash Rangan: Got it. Thank you so much. That just sound like a share gain story. Thank you so much. Appreciate it. Brett Iversen: Thanks, Kash. Operator, next question please. Operator: Our next question comes from Gregg Moskowitz with Mizuho. Please proceed with your question. Gregg Moskowitz: Okay, very much for taking the question. Satya, in your prepared remarks, you spoke about an increase in verticalization of Azure. Can we double click on that a bit more? How much incremental opportunity do you see in industries like financials, like manufacturing? And are there other verticals that may make sense to more as we pursue over time as well? Satya Nadella: Thank you for the question. We absolutely think that ultimately, customers are looking to increase their time to value lower cost and improve agility. So being able to customize these workflows, to come up with industry schemers because when you think about increased digitization and workflow automation, it does take that next level of schematization of what is perhaps today not digital inside an industry. And so therefore, what we do by stitching together, coming together of even Microsoft 365, Teams, Power Platform with certain workflows, with data inside of Azure, as well as Dynamics, that absolutely improves the ability for any customer in any one of these industries to improve their time to value. So yes, it is going to both help us with adoption rates increase, the speed with which it increases and it also differentiates us. And we'll continue to look. And one of the other things that we're doing is it's not just one industry at a time. It's also the cross-industry workflows. So we absolutely believe that that -- we already talk about not just any individual part of our cloud, we talk about only one thing, it's called the Microsoft Cloud. And now we're increasingly talking about Microsoft Cloud by industry and cross industry. Gregg Moskowitz: Very helpful. Thank you. Satya Nadella: Thanks Gregg. Operator, we have time for one last question. Operator: Our final question will come from the line of Raimo Lenschow with Barclays. Please proceed with your question. Raimo Lenschow: Hey, thanks for squeezing me in. I wanted to ask about security and what we see in terms of changes of the industry and how Microsoft is kind of fit in there where, obviously in the last quarter, that was kind of a big topic. Can you talk a little bit about what you see in terms of customers realizing the broadened offering from Microsoft and how the cloud is playing a changing role there? Thank you. Satya Nadella: No. Thank you for the question. Obviously, security is a super important topic for every customer, every board, every executive team. And the fundamental approach we have is, how do we ensure that every customer has implemented a zero trust architecture. But that's the name of the game which is, how can Microsoft through participation in the security industry, accelerate essentially the cyber defense of the entire digital factor and beyond. And so to me, what we have done is taken a pretty unique approach of bringing identity, endpoint application, infrastructure all together with XDR and SIM, which is cloud native. That's pretty unique because we really don't let the get in the way. We'll make sure that any customer who is able to sort of deploy these systems together has more defense in depth, but also the aggregate data to be able to detect and respond to any intrusion because that's sort of the key posture. And then you couple that with our operational security posture when you're processing 8 trillion events and using that to continuously help our customers is increasing to your point, the cloud adoption rate. So if you look at some of the challenges like HAFNIUM, the cloud was not impacted. And when we did sort of a lot of work to make sure that the patches were out even for servers that were out of support for multiple years. And so -- but at the same time, any business that had moved already to the cloud had none of those issues. So, therefore, I think we are going to see increased cloud adoption. We're going to see increased usage of end-to-end security suites like what we offer. And most importantly, great hygiene and great operational security posture all the time with zero trust architecture. Raimo Lenschow: Thank you. Brett Iversen: Thanks Raimo. 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 soon. Amy Hood: Thank you all. Satya Nadella: Thank you. Operator: Ladies and gentlemen, this concludes today's conference. Thank you for your participation and you may disconnect your lines at this time.
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.
