Current Price: $203 Price Target: $224
Position Size: 7.6% TTM Performance: 52%
Key takeaways:
· MSFT beat on revenue and EPS. Total revenue growth was +13% on a constant currency basis.
· Couple negatives in the quarter. Azure revenue was slightly below expectations…+47% growth vs +49% expected.
Currency was a drag – constant currency, Azure was up 50%. Also guidance was a little below expectations w/ SMB spending a key weak area. But long-term drivers and positioning still very strong.
· Cloud strength continues to be a key theme – commercial cloud surpassed $50 billion in annual revenue, +36% YoY.
· Satya Nadella said, “The last five months have made it clear that tech intensity is the key to business resilience. Organizations that build their own digital capability will recover faster and emerge from this crisis stronger”…” over the next decade technology spending as a percentage of GDP is projected to double and we are well-positioned to participate in that growth by innovating and defining the key technologies that empower every person and every organization on the planet to build more of their own tech intensity.”
Additional Highlights:
· “We are seeing businesses accelerate the digitization of every part of their operations from manufacturing to sales and customer service to reimagine how they meet customer needs from curbside pickup and contactless shopping in retail to telemedicine in healthcare. That’s why we are building the full modern technology stack powered by cloud and AI and underpinned by security and compliance to help every organization digitally transform.”
· Strength in cloud but some offset w/ slowdown in transactional licensing especially in SMB and LinkedIn ad spending. This is consistent w/ trends they called out in the last few weeks of the last quarter.
· As previously announced, they closed their ~80 retail stores. $450m charge related to this.
· Productivity and Business Processes ($11.8B) +8% YoY cc:
o Cloud usage and demand increased as customers continued to work and learn from home. Transactional license purchasing continued to slow, particularly in small and medium businesses, and LinkedIn was negatively impacted by the weak job market and reductions in advertising spend.
o Strength especially w/ Office 365 Commercial (up 22%), Dynamics 365 (up 40%).
o LinkedIn slowed from up 22% last Q to up 11%. Less hiring is weighing on this. Office 365 now has 258 million paid seats.
o Dynamics 365 is helping organizations in every industry digitize their end-to-end business operations from sales and customer service to supply chain management. BNY Mellon chose Dynamics 365 this quarter to help investment managers build stronger relations with their customers. FedEx uses Dynamics 365 to drive more precise logistics and inventory management. In retail, “Dynamics 365 Connected Store” now offers in-store traffic analytics and curbside pickup prioritizing safety as stores reopen
o Teams product is really shining for them right now. Accelerating Teams innovation, adding new capabilities. Deeper integration between Teams and Power Platform brings faster application creation and deployment. Expanding Teams beyond the workplace making it easy to add personnel Teams account on mobile.
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 w/ mixed office and WFH environment in the future.
o LinkedIn continues to see record engagement despite revenue headwinds due to lower hiring needs. Now at 706m professionals. Content shared was nearly — up nearly 50%. Professionals watched nearly 4x the amount of LinkedIn Learning content in June than they did a year ago.
· Intelligent Cloud ($13B) +19% YoY cc:
o Cloud usage and demand increased as customers continued to work and learn from home.
o Server products and cloud services revenue increased 21% with Azure revenue growth of 50% 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 Italy, New Zealand and Poland…last quarter they added Mexico and Spain.
o In FY ’20 closed a record number of multimillion-dollar commercial cloud agreements with material growth in the number of $10 million-plus Azure contracts.
o Enterprise Services revenue increased 2% constant currency.
· More Personal Computing ($12.9B) +16% YoY cc:
o Windows OEM, Surface, and Gaming benefited from increased demand to support “work, play, and learn-from-home” scenarios, while Search was negatively impacted by reductions in advertising spend. Seeing headwinds from SMB spending.
o Strength in Xbox and Surface. Xbox content and services revenue increased 65% (up 68% in constant currency. Surface revenue increased 28% (up 30%in constant currency)
o “A breakthrough quarter for Gaming”…they saw record engagement and monetization led by strength on and off console as “people everywhere turn to gaming to connect, socialize and play with others.” Xbox Game Pass is seeing record subscriber growth.
o Windows OEM revenue increased 7%.
o Search ad rev ex-TAC down 17%
o Windows Commercial products and cloud services revenue increased 11%
· Commercial Cloud ($14.3B, +32% YoY ($50B full year, +36% YoY))
o “Commercial cloud” aggregates the cloud businesses w/in the first two segments: Office 365, Azure, the commercial portion of LinkedIn, Dynamics 365.
o Gross margin percentage increased 1 point YoY on 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, companies like Schlumberger and T-Mobile are using Power Platform to address challenges created by COVID-19. Power BI is the clear leader in business intelligence in the cloud and is growing significantly faster than competition, 96% of the Fortune 500 now use Power BI to find insights in their data.
Valuation:
· FCF was $14 billion, up 16%. They returned $9B to shareholders w/ $5B in share repurchases and $4B in dividends an increase of 16% vs Q419.
· 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.
· Stock is getting more expensive, trading at <3% 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]