Microsoft Corporation (MSFT) on Q4 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to the Microsoft Fiscal Year 2021 Fourth 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brett Iversen, General Manager of 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, Chairman and Chief Executive Officer; Amy Hood, Chief Financial Officer; Alice Jolla, Chief Accounting Officer; and Keith Dolliver, Deputy General Counsel. Satya Nadella: Thanks much, Brett. We had a very strong close to our fiscal year. Our commercial cloud surpassed $69 billion in annual revenue, up 34%. We have seen revenue growth across industries, customer segments and geographies with over 50% of sales coming from outside the United States. We continue to grow new franchises for Microsoft in large and growing markets. In the past three years alone, gaming, security and now LinkedIn, have all surpassed $10 billion in annual revenue. Amy Hood: Thank you, Satya, and good afternoon, everyone. This quarter, revenue was $46.2 billion, up 21% and 17% in constant currency. Earnings per share was $2.17, increasing 49% and 42% in constant currency. In our largest quarter of the year, focused execution by our sales and partner teams, along with broad-based strength across geographical markets and customer segments drove another very strong quarter of top and bottom line growth. In our commercial business, healthy demand for our differentiated hybrid and cloud offering as well as increased long-term commitment to our platform drove significant growth in the number of $10 million-plus Azure and Microsoft 365 contracts. Customer reliance on the Microsoft Cloud drove sequential increases in usage across Teams, Power Platform and our Advanced Security and identity offerings, which are empowering organizations to shift to hybrid work and modernize business processes. And in LinkedIn Talent Solutions business, an improving job market drove strength in annual contracts and job postings. In our on-premises business, strong annuity performance across Officer, Server and Windows also benefited from a greater mix of contracts with higher in-period revenue recognition under ASC 606. In our Consumer business, Windows OEM and Surface were impacted by the ongoing constraints in the supply chain. Search and LinkedIn benefited from an improved advertising market. And in gaming, we again saw strong engagement across our platform, while demand for Xbox Series X and S consoles continued to exceed supply. As a reminder, Q4 was the first full quarter impacted by COVID-19 a year ago across revenue and operating expense. This quarter, even with a declining exploration base, commercial bookings grew 30% and 25% in constant currency, significantly ahead of expectations, driven by strong 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 32% and 31% in constant currency to $141 billion. Roughly 45% will be recognized in revenue in the next 12 months, up 25% year-over-year. The remaining portion, which will be recognized beyond the next 12 months, increased 38% year-over-year, highlighting the growing long-term commitment to our Microsoft Cloud. And our annuity mix increased 1 point year-over-year to 95%. Commercial cloud revenue, also better than expected, was $19.5 billion as growth accelerated to 36% and 31% in constant currency. Commercial cloud gross margin percentage expanded 4 points year-over-year to 70%, with roughly 1 point from the change in accounting estimate for the useful life of server and network equipment assets. Excluding this impact, commercial cloud gross margin percentage increased despite revenue mix shift to Azure, driven by improvement across all our cloud services on a prior year comparable impacted by strategic investments we made to support significant customer engagement and usage in remote work scenarios, including free trials, flexible financing options and capacity for cloud infrastructure usage. With the weaker U.S. dollar, FX increased growth by approximately 4 points, about 1 point more favorable than anticipated. FX increased COGS growth by approximately 1 point and operating expense growth by approximately 2 points, both in line with expectations. Gross margin dollars increased 25% and 20% in constant currency. Gross margin percentage was 70%, up 2 points year-over-year, with roughly 1 point of favorable impact from the change in accounting estimate. Excluding this impact, Company gross margin percentage increased despite sales mix shift to the cloud, driven by commercial cloud gross margin percentage improvement noted earlier. Operating expense grew 6% and 4% in constant currency, in line with expectations on a prior year comparable that included roughly 4 points of impact from the realignment of our retail storage strategy and 2 points of impact from an increase in bad debt expense. Overall, Company headcount grew again this quarter, up 12% year-over-year as we continue to invest across key areas like cloud engineering, sales and customer deployment. Operating income increased 42% and 35% in constant currency, and operating margins expanded 6 points year-over-year to 41%, including roughly 2 points of impact from the retail stores charge and increase in bad debt expense in the prior year and nearly 1 point of favorable impact from the change in accounting estimate. Now, to our segment results. Revenue from Productivity and Business Processes was $14.7 billion and grew 25% and 21% in constant currency with better-than-expected performance across all businesses. Office Commercial revenue grew 20% and 15% in constant currency. Office 365 Commercial revenue grew 25% and 20% in constant currency, again driven by installed base expansion across all workloads and customer segments, as well as higher ARPU. Paid Office 365 Commercial seats increased 17% year-over-year, with continued recovery driving acceleration in our small and medium business and frontline worker offerings. Demand for Microsoft 365, particularly for security, compliance and voice drove strong E5 momentum again this quarter. E5 now accounts for 8% of our Office 365 Commercial installed base. And on a low prior year comparable impacted by a slowdown in transactional purchasing, Office Commercial licensing was ahead of expectations, down 8% and 11% in constant currency, also benefiting from higher in-period revenue recognition noted earlier. In Office Consumer, revenue grew 18% and 15% in constant currency, driven by continued momentum in Microsoft 365 subscriptions, which grew to 51.9 million, up 22% year-over-year. Dynamics revenue grew 33% and 26% in constant currency, better than expected. Dynamics 365 revenue growth was 49%, and 42% in constant currency, with strong momentum in Power Apps and Power Automate, reflecting growing demand for our modern solutions to build apps and automate workflows. Dynamics 365 now accounts for over 70% of total Dynamics revenue. LinkedIn revenue increased 46% and 42% in constant currency, ahead of expectations against the comparable impacted by the advertising and job markets of a year ago. Segment gross margin dollars increased 33% and 27% in constant currency, and gross margin percentage was up 5 points year-over-year, primarily driven by improvement in our cloud services against a low prior year comparable impacted mostly by increased usage. The change in accounting estimate drove roughly 1 point of favorable impact. Operating expense increased 8% and 6% in constant currency, and operating income increased 62% and 53% in constant currency, including 4 points due to the change in accounting estimate. Next, the Intelligent Cloud segment. Revenue was $17.4 billion, increasing 30% and 26% in constant currency. We exceeded expectations across our consumption and per-user Azure businesses as well as in our on-premises server products business. Overall, server products and cloud services revenue increased 34% and 29% in constant currency. Azure revenue grew 51% and 45% in constant currency, driven by strong performance across our core and premium consumption-based services. In our per user business, the enterprise mobility and security installed base increased 29% to over 190 million seats. Our on-premise server business increased 16% and 12% in constant currency, driven by strong annuity performance and benefiting roughly 4 points from the higher in-period revenue recognition noted earlier, particularly in some of our largest deals in the quarter. Enterprise Services revenue grew 12% and 9% in constant currency, driven by growth in premier support services and Microsoft consulting services. Segment gross margin dollars increased 32% and 27% in constant currency. Gross margin percentage increased 1 point year-over-year with roughly 1 point of favorable impact from the change in accounting estimate. Operating expense increased 14% and 12% in constant currency, and operating income grew 46% and 39% in constant currency, including 3 points due to the change in accounting estimate. Now to More Personal Computing. Revenue was $14.1 billion, increasing 9% and 6% in constant currency, with better-than-expected performance in Windows Commercial, gaming and search offsetting OEM and Surface weakness from supply chain constraints. OEM revenue declined 3% and Surface declined 20% and 23% in constant currency as both were impacted by the significant supply chain constraints noted earlier in a good demand environment. Windows Commercial products and cloud services revenue grew 20% and 14% in constant currency, driven by demand for Microsoft 365, with some benefit from the higher in-period revenue recognition, noted earlier. Search revenue ex TAC increased 53% and 49% in constant currency, benefiting from the improved advertising market. And in gaming, revenue increased 11% and 7% in constant currency. Xbox hardware revenue grew 172% and 163% in constant currency, driven by demand for our new consoles. Xbox content and services revenue declined 4% and 7% in constant currency against a high prior year comparable. Segment gross margin dollars increased 8% and 4% in constant currency. Gross margin percentage decreased roughly 1 point year-over-year, driven by sales mix shift to gaming hardware. Operating expense decreased 6% and 7% in constant currency, including approximately 13 points of impact from the retail stores charge in the prior year. And operating income grew 19% and 13% in constant currency. Now, back to our total Company results. Capital expenditures, including finance leases, were $7.3 billion, in line with expectations, driven by ongoing investment to support growing global demand and usage of our cloud services. Cash paid for PP&E was $6.5 billion. Cash flow from operations was $22.7 billion, increasing 22% year-over-year, driven by strong cloud billings and collections. Free cash flow was $16.3 billion, up 17%, reflecting higher capital expenditures in support of our growing cloud business. For FY21, we generated over $76 billion in operating cash flow, up 26% year-over-year, and over $56 billion in free cash flow, up 24% year-over-year. This quarter, other income and expense was $310 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 effective tax rate was approximately 15%. And finally, we returned $10.4 billion to shareholders through share repurchases and dividends, bringing our total cash returned to shareholders to over $39 billion for the full fiscal year. Now, before we turn to our outlook, I’d like to provide a few reminders for next fiscal year. Revenue growth rates across all segments will reflect the impact from COVID-19 a year ago, though the impacts do shift as we move through the year. Also, our FY21 operating income and margin benefited from two factors that will be headwinds in FY22: first, the change in accounting estimate for the useful life of server and network equipment resulted in $2.7 billion of depreciation expense, shifting from FY21 to future periods; and second, we saved nearly $1.2 billion in operating expense from COVID-19-related restrictions, which will also moderate in FY22 as geographies reopen globally. With those reminders in place, let’s move to our next quarter outlook. Accelerating digital transformation and consistent strong execution should drive another quarter of growing commitment to our Microsoft Cloud. In commercial bookings, our core annuity sales motions should drive healthy growth on a growing expiry base even against a strong prior year comparable. As always, quarterly volatility in bookings can be driven by an increasing mix of larger long-term Azure contracts, which are more unpredictable in their timing. Commercial cloud gross margin percentage should decrease roughly 1 point year-over-year, with roughly 4 points of negative impact from the change in accounting estimate previously discussed. Excluding the accounting change, Q1 gross margin percentage will increase despite revenue mix shift to Azure, driven by continued improvement across our cloud services on a prior year comparable impacted by the strategic investments we mentioned earlier. Longer term, which excludes the impact of the accounting change, commercial cloud gross margin percentage will continue to be impacted by the same three things we often discuss, revenue mix shift to Azure, increased usage of our cloud services 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 global demand for our cloud services. Now to FX. Based on current rates, we expect FX to increase revenue growth of the total Company and all individual segment levels by approximately 2 points and total operating expense and COGS growth by approximately 1 point. Now to segment guidance. In Productivity and Business Processes, we expect revenue between $14.5 billion and $14.75 billion. In Office Commercial, revenue growth will again be driven by Office 365 with healthy seat growth across segments and continued momentum in E5. In our on-premises business, we expect revenue to decline approximately 20%, consistent with the ongoing customer shift to the cloud. In Office Consumer, against a strong prior year comparable, we expect high-single-digit revenue growth with continued momentum in Microsoft 365 Consumer subscriptions. For LinkedIn, continued strong engagement on the platform and improvements in the advertising and job markets should drive revenue growth in the high 30% range. And in Dynamics, we expect continued strength in Dynamics 365, which includes our significant momentum in Power Apps to drive revenue growth in the high-20s. For Intelligent Cloud, we expect revenue between $16.4 billion and $16.65 billion. In Azure, revenue will be driven by continued 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 rate, given the size of the installed base. Therefore, in constant currency, Azure revenue growth should remain relatively stable on a sequential basis. In our on-premises server business, we expect revenue growth in the high single digits, driven by continued demand for our hybrid and premium annuity offerings against a low prior year comparable. And in Enterprise Services, we expect revenue to be in the high single digits. In More Personal Computing, we have estimated the Q1 impact of the required Windows 11 revenue deferral that will shift to Q2 to be approximately $300 million. Therefore, our segment revenue outlook is $12.4 billion to $12.8 billion. Given the 10-point estimated negative impact from the deferral, OEM revenue should decline mid to high single digits in Q1. In Surface, on a strong prior year comparable, we expect revenue to decline in the low teens as we continue to work through the supply chain challenges. In Windows Commercial, products and cloud services, continued demand for Microsoft 365 and our advanced security solutions should drive healthy double-digit growth. In search ex TAC, we expect revenue growth in the high-30s, driven by improvements in the advertising market. In gaming, we expect revenue growth in the low double-digits. Console growth will again be constrained by supply. And on a strong prior year comparable, Xbox content and services revenue should grow low single digits. Now back to Company guidance. We expect COGS of $13.55 billion to $13.75 billion and operating expense of $11.6 billion to $11.7 billion. In other income and expense, interest income and expense should offset each other. And finally, we expect our Q1 tax rate to be approximately 16%, lower than our expected full year rate, given the volume of equity vest in our first quarter. In closing, we remain focused on driving revenue growth as we invest boldly against the strategic high-growth opportunities ahead that will deliver significant value to our customers worldwide. Our outlook for FY22 reflects this with healthy double-digit revenue and operating income growth. Together that results in expanded operating margins in FY22 after excluding the headwinds from the useful life change noted earlier. Together with our customers and partners, we look forward to FY22. Now 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 your instructions? Operator: Our first question is coming from the line of Keith Weiss with Morgan Stanley. Keith Weiss: Thank you for taking the question, guys. And congratulations on a great FY21 and a great end to the fiscal year. Satya, last year at this time, you made a comment that I think really defined the conversation in software over the past year. When you’re talking about an acceleration in digital transformation you saw coming out of COVID, and I think that’s evident in the results that we see here with 25% growth in your commercial bookings growth. What I want to ask you is the durability of that growth on a going-forward basis. Was that acceleration a pull forward of demand and at some point we’re going to have that hard comp, or do you see durability in this acceleration on a go-forward basis? Is there a lot more to come? And then, Amy, to you, a similar kind of question but more on sort of the margin side of the equation. I think your entire tenure at Morgan -- at Microsoft has really been defined by good operational controls and ability to grow gross profit dollars well ahead of OpEx. Is that durable longer term? Is there still enough sort of efficiency gains at Microsoft to be able to keep that up over the medium term, if you will? Satya Nadella: Thanks so much, Keith, for the question. I mean, the way we see the results today reflect that, but more importantly, on a secular basis, as I think about -- I always go back to that number, which is 5% of the world GDP is tech spend, it’s projected to double. I think that doubling will happen in a more accelerated pace. And we feel well-positioned because of the innovation across the stack. Because if you think about it, what’s going to happen is every business, whether you’re a retailer or a manufacturer, in the service sector, public sector or private sector, digital adoption is the way you’re going to be both, resilient as well as transform the core business processes. And the strength we have is that entirety of the Microsoft Cloud stack, right? So, it’s not just about infrastructure or any application, it’s the entirety of what we do. And so, I think it is durable. Quarter-to-quarter, depending on what happened during the pandemic, depending on the segments that were impacted, for example, the consumer segments that were impacted are coming back and then they’ll normalize. Whereas in our case, we do, in fact, one of the things I love about sort of our exposure is both, it’s a worldwide exposure and it has got the right balance between the consumer segments and the enterprise business-to-business segment. So, it’s a very durable long-term growth prospect that we have tough competition, we need to keep innovating, which is what we’ll stay focused on. Amy Hood: And maybe turning to your margin question, and while I am obviously proud of the work we’ve done, Keith, that you referenced as a team on margins and returns, I would say, in general, our focus remains and has been for the duration of really Satya and I’ve work together along with the rest of the SLT on consistently moving our resources and talent to our highest growth and most differentiated places. When you do that in expansive total addressable markets in the way that I believe we’re focused on as an organization, you do see the type of operating leverage that you’re referring to in margins. And that along, as you see sort of mathematically with a shift in our revenue to higher overall gross margin segments, you do get the results we’ve seen. So, I feel very good about the work we’ve done. And as you heard, I’m quite optimistic about the opportunities we have to invest, leading into FY22 as well. Operator: Our next question comes from the line of Mark Moerdler with Bernstein Research. Mark Moerdler: Thank you very much for taking the question. And again, also, congrats on the quarter, and Amy, thanks for the details and color, especially in the guidance. So, I want to ask about seasonality in Azure. Traditionally, we’ve seen seasonality in the Azure numbers in Q4. And obviously, last year, we didn’t see it because of COVID, but we also didn’t see it this year. Has something changed that has changed the seasonality of the business? And does that continue going forward? And then, as a follow-up question, Keith asked about OpEx efficiency overall, but I’d like to ask specifically on the cloud. Is there any reason that cloud OpEx shouldn’t continue to grow slower than revenue, obviously, on an annual basis, not a quarterly basis? Thank you. Amy Hood: Thanks, Mark, for the question. Let me cover your first one, which is the seasonality in the Azure business. In some ways, Mark, some of that seasonality frankly was because Azure has two fundamental components. It’s got a consumption model as well as a per-user model. The per-user model, which as you well know is far more aligned to our end-of-year and can be more aligned to our end-of-year rhythms. It also can have more quarterly volatility in terms of accounting, in terms of revenue recognition, the same topic we often talk about when it comes to Microsoft 365 in terms of more in-quarter recognition. What you’ve seen is that did historically represent a larger component of Azure, so added volatility to Q4. As we’ve seen our consumption businesses grow and grow consistently, thus far becoming a larger percentage of Azure, you do have more stability, Mark. And so, you start seeing less of that volatility that we’ve historically seen from Q3 to Q4. We still have some of it, as we talked about, but I think it’s an interesting observation and it’s a very good question. In terms of your comment on cloud revenue and OpEx, yes, I do believe that’s durable. We get a lot of focus. We’ll continue to invest. There’s lots of opportunity there, but the market certainly warrants it. Operator: Our next question is coming from the line of Brent Thill with Jefferies. Brent Thill: Amy, a lot of questions on margins, I’m curious if you think there is the ceiling in the near term on margins, or do you feel that you’ve got an elevated flight level, if you will, and we shouldn’t have to be worrying about that level of margins? Can you just give us any more color as it relates to how you’re thinking about that? Thank you. Amy Hood: Well, I think for FY22 on operating margins, which is really where I focus most of my thoughts, as I said, when you exclude the useful life change, I feel very good about margin improvement in FY22. But, what sits behind that, Keith is -- I mean, sorry, Brent, is this focus on the first thing I said, which is with every operating expense dollar we invest, are we continuing to invest in the highest growth places? If you continue to invest in high-growth places with differentiation that customers care about and you add value, you continue to see improvements in this area. From time to time, I’m sure there’ll be quarters where that isn’t the case, if we have some mix shift in hardware, et cetera. But in general, over a longer period of time, you’ve seen us focus on this. And so, if you remove a little of the noise and some of the useful life changes and look back a few years, I do think you’d see the biggest needle mover being where we invest the dollars as opposed to the overall amount of them, which should grow based on the opportunity. Operator: Our next question comes from the line of Karl Keirstead with UBS. Karl Keirstead: Thanks very much. Amy, thank you for giving more formal Azure guidance for the next quarter. That’s very helpful. So, if Azure is going to remain stable in constant currency, I guess at 45%, and you had indicated that EMS growth should moderate, effectively, you’re saying that the consumption piece of Azure might accelerate in the September quarter. So, I’m wondering if you could unpack that a little bit. Is this as simple as prior period commitments simple as prior period commitments ramping at an accelerated pace? I’d love to hear your thoughts. Thank you. Amy Hood: Thanks, Karl. I think, in general, you’ve got the right trajectory. And I do think it’s both things. You’ve heard me say, it’s both some of our core as well as premium SKUs. We’ve seen some nice execution. And I think Satya mentioned some of these differentiated places in the Azure stack, where I think we also can see some growth. Data services is a very good point where I feel like we’ve made a lot of progress, have a real differentiation, have seen some acceleration in the past couple of quarters. Operator: Our next question is coming from Mark Murphy with JP Morgan. Mark Moerdler: Satya, at the Ignite Conference a few months ago, you commented that cloud architectures have reached peak centralization. I’m wondering what developments are you seeing that inform your viewpoint. And Amy, do you sense uplift in some of those intelligent edge products such as Azure Stack or others contributing to the improvement in server products growth that we saw this quarter? Satya Nadella: Thanks so much for that question. A couple of things that are happening. One is that all up, even what we consider the cloud infrastructure is getting increasingly distributed. If you think about the approach we took to our data center architecture, the fact that we have more regions, is to meet, I would say, both the real-world needs for the computing architecture side but also the regulatory and data residency requirements. So, we feel we picked the right approach. And that’s paying dividends today just even in terms of our geographic coverage, our coverage of all of the regulatory requirements. Then, the second piece, of course, is distributed computing will remain distributed. And what we are seeing with edge is going to be the case where we will see more of both the old workloads with hybrid benefits and hybrid deployments as well as new workloads, right? So, if you take the AB InBev Digital Twin meets IoT type of scenario, that’s going to require a lot more compute close to their factories. And so, to me, those new scenarios -- or 5G, I mean, think about what AT&T is planning to do, which is a hybrid deployment in a completely new space where there is going to be compute that’s located to be able to take core network traffic and use cloud economics. So, that’s what we think of going forward, which is really compute will remain distributed, both because of their needs across geographies, regulation and the very nature of compute architecture. Amy Hood: And to the question you asked on how to think about the edge and where to see that in results, really, it shows up. This is one where I would focus on the overall server products and cloud services number, which I think, Mark, was at the heart of your question because through our purchasing vehicles, the most effective way to purchase for flexibility with and across the edge in the cloud is sometimes some of the on-prem licensing with hybrid rights. So, you do see that both in our Azure results but also depending on how it’s purchased and server KPI. Operator: Our next question comes from Brent Bracelin with Piper Sandler. Brent Bracelin: A question for you really around $10 million-plus contracts. You called out momentum this quarter and last quarter. My question is around the drivers of these large enterprise commitments. Is this driven by just the larger scope of deals, or are you seeing kind of broader attach rate across the whole breadth of Microsoft Cloud products? Thanks. Amy Hood: Thanks, Brent. Maybe, Satya, I’ll take this one first and if you want to add anything. Brent, unfortunately, I’m going to answer it’s everything, and let me talk about why I say that. When you see the size of the contracts increase, it’s about the entire scope of what’s offered under the Microsoft Cloud. We’re seeing both really strong renewals of our core contracts, really strong additions across Dynamics, Power Apps, Power Automate, M365, premium SKUs, security, compliance, voice, which, of course, increases those commitment sizes. And you’re seeing the addition of Azure commitments, which we often talk about as these multiyear longer-term contracts. And so, then you do, of course, see them just have longer duration on -- especially in the case of Azure. So, in many ways, what we focus on are the components that make up the larger contracts is each component being additive to selling the value that’s present across all of our pieces of the Microsoft Cloud. And this was a good execution quarter for us. You see it in the bookings number even more. When you have a declining expiry base and then bookings growth that’s that high you have to do all those things well. And that’s I think really what’s reflected ultimately and transactionally, meaning those larger $10 million-plus contracts being done. Operator: Our next question comes from Alex Zukin with Wolfe Research. Alex Zukin: I guess my main question maybe for Satya, you’ve taken -- you’ve noted the future of work having changed, and you talked about the fusion of Teams into both, the application stack, the operating system stack and really amongst the entire Microsoft portfolio. Is that driving -- given the acceleration you’re seeing in Dynamics, can you talk to the fact, is that driving larger deals, new bites at the apple, or how is that changing the landscape? And how do you think about that versus what your competitors are doing? Satya Nadella: Yes. That’s a great question. Thanks for that. Multiple things happening and both -- some of them are independent secular growth trends and they do reinforce each other. Let’s just take Dynamics. It’s probably one of the most exciting things we are seeing is that coming out of this pandemic, there is an absolute new chapter for a complete new suite all the way from whether it’s sales, to customer service, to marketing, to supply chain, or digital manufacturing, that’s all going to be re-implemented. So, there’s going to be a complete new cycle of business process automation that is going to be AI-first and collaboration-first. And that second part is where that intersection between Teams and Business Process or Dynamics comes through, because you do not want to have a system of record for anything, whether it is a customer or a part or a forecast that you don’t want to collaborate on, that you don’t want to communicate on. And by the way, the communications and the collaboration artifacts are part of the record. And that’s what I think that this new generation of software will enable. And so, you see it in two fronts. One is, Teams has become a platform, not just for Dynamics, even for Salesforce, for SAP, for Adobe, for ServiceNow. They’re all building great integrations into Teams and we’ll foster that. And Dynamics itself of course will integrate deeply with Teams and embed Teams or Azure Communication Services. So, when you think about our omnichannel customer service module, it doesn’t look like anything that -- from two years ago. It’s a completely rebuilt omnichannel customer service system, which has all the communication functionality built in. So, it’s a pretty exciting space. And it also speaks to a lot of the questions around where is the margin, how is it going to sort of evolve? I think tracking what’s happening with Power Platform, Dynamics and Teams, I think probably and its intersection to even some of our data layers in Azure is perhaps the best indication of some of our competitive differentiation at scale already. Operator: Our final question comes from the line of Keith Bachman with Bank of Montreal. Keith Bachman: Amy, I wanted to direct this to you and go back to margins for a second. Is there any comments or color that you could provide? I know you said you focused on the operating margin side, but on the trends that you anticipate this year in ‘22 around gross margins with or without the depreciation schedules. Part B is, on the last quarter call, you indicated that operating expenses might grow kind of mid-teens or low teens, I should say, in ‘22. I was wondering if you would want to update the comments on how we should be thinking about operating expense trends as we look at FY22. Thank you. Amy Hood: Thanks, Keith. When I think about your operating expense comments, no, I don’t have any update to that. I think if you think about our headcount growth at 12%, plus through the year, continuing to invest in some of the places where we saw savings through the year on COVID, I would expect that that is still a good placeholder for people as we work through the year. I mean, with the opportunity we see in the market, I think it supports that level. And given our execution, when we do invest, which leads me to margin, I feel very good about that. At the gross margin level, we’ll continue I feel very good always focused on, which is continuing across our cloud services to see improving margins. You’ll continue to see a mix shift to Azure, given the growth we expect there. And we’ll continue to see gross margin improvements across individual services that make up many of our components across the Company. So, in general, I feel like the gross margin trends are quite healthy heading into ‘22. Brett Iversen: Thanks, Keith. So, 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, everyone. Satya Nadella: Thank you. Operator: Ladies and gentlemen, this concludes today’s conference. We 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.
