Key takeaways:
· MSFT beat across all segments. Total revenue growth accelerated to +16% on a constant currency basis vs +15% the past two quarters.
· COVID-19 had minimal net impact on total revenues as strength in some areas offset weakness in others. Cloud strength was a key theme.
· Guidance better than feared…high end of their guidance for Q4 was ahead of consensus. Assumes advertising spend levels from March do not improve in Q4, which will impact Search and LinkedIn.
· Satya Nadella said, “we’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security”…”There is both immediate surge demand, and systemic, structural changes across all of our solution areas that will define the way we live and work going forward.”
Additional Highlights:
· Cloud strength was a key theme. They saw increases in cloud usage, particularly in Microsoft 365/Teams, Azure, Windows Virtual Desktop, advanced security solutions and Power Platform. Azure sales were +61% constant currency. Gaming along with Windows OEM and Surface also benefitted from these trends, partially offset by supply chain constraints in China that began improving in March. Strength in cloud also slightly offset in the last few weeks of the quarter by a slowdown in transactional licensing especially in SMB and LinkedIn ad spending.
· Productivity & Business Processes segment and Intelligent Cloud segment were both ahead of the high end of their guidance. And for More Personal Computing –they had removed guidance in March related to potential impact to PC supply from Covid-19, but results ended up being within guidance.
· Productivity and Business Processes ($11.7B) +16% YoY:
o Strength across all products especially in Office 365 Commercial (up 27%), Dynamics 365 (up 49%) and LinkedIn (up 22%). Office 365 now has 258 million paid seats.
o Teams product is really shining for them right now. Teams now has more than 75 million daily active users. “We saw more than 200 million meeting participants in a single day this month.”
o Organizations are realizing they need a comprehensive solution and Teams is the only solution with meetings, calls, chat, collaboration and with the power of Office and business process workflows in a single integrated user experience with strong security.
o Teams is being used by New York state’s largest health provider to deliver telehealth. Teams powered the virtual NFL draft.
o 20 organizations with more than 100k employees are now using Teams, including Continental AG, Ernst & Young, Pfizer and SAP. Last week, Accenture became the first organization to surpass 500k users.
o Accelerating Teams innovation, adding new capabilities each week and now support meetings of all sizes, meetings that scale from 250 active participants to live events for up to 100,000 attendees to streaming broadcast.
o Teams is not just about having lots and lots of video meetings. Teams is about actually getting work done where meetings and video is one part. The utility of it will only increase as some people go back to working at the office.
o LinkedIn seeing record engagement. 690m professionals. Users watched nearly 4 million hours of content on LinkedIn Learning in March, ~50% increase month-over-month. However, significant reduction in advertising spend, which impacted LinkedIn (and search).
· Intelligent Cloud ($12.3B) +29% YoY:
o Server products and cloud services revenue increased 32% with Azure revenue growth of 61% driven by continued strong growth in their consumption-based business.
o With Azure they have more data center regions than any other cloud provider. This quarter, they announced new regions in Mexico and Spain.
o “Will continue to aggressively expand our cloud infrastructure to support not only the usage surges of today, but the growing customer demand for our unique and differentiated cloud offerings in the future.”
o Enterprise Services revenue increased 7%.
· More Personal Computing ($11B) +4% YoY:
o The supply chain in China returned to more normal operations at a faster pace than we had anticipated. And we saw increased demand from work, play and learn from home scenarios, benefiting Windows OEM, Surface, Office Consumer and Gaming.
o Windows OEM revenue was relatively unchanged year over year
o Windows Commercial products and cloud services revenue increased 18%
o Search advertising revenue excluding traffic acquisition costs increased 1%. In Search ex-TAC in Q4, they expect revenue to decline in the mid-20% range, similar to March.
o Xbox content and services revenue increased 2%. 19 million active users of Xbox Live. Seeing increased monetization of in-game content and services.
o Surface revenue increased 2%
· Commercial Cloud ($13.3B), +40% YoY
o Called out MasterCard, Autodesk, AARP and Coca Cola having signed 5 yr. multi-cloud agreements for Microsoft 365, Dynamics 365 and Azure.
o Gross margin percentage increased 4 points YoY to 67% on significant improvement in Azure gross margins.
o COVID-19 has accelerated the urgent need for every business to create no-code, low-code apps. This is small for them, but important in terms of strategic positioning and future growth. The Power Platform enables non-technical employees to analyze data and create apps/workflows without coding knowledge. For example, Power Platform was used to build a new applications in hours so that first-line workers could track PPE because there was no ERP system that did that.
Valuation:
· FCF was $13.7 billion, up 25%. They returned $10B to shareholders in share repurchases and dividends.
· Recurring revenue is ~60% of total, underpins most of their valuation and is resilient and poised for additional growth. Particularly Azure, Office 365 and Dynamics 365.
· Trading at ~3.5% FCF yield on next year.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$MSFT.US
[category earnings ]
[tag MSFT]