Current Price: $239 Price Target: Raising to $255 (from $225)
Position Size: 7.6% TTM Performance: 41%
Key takeaways:
- Broad beat and strong guidance– Revenue growth accelerated to +17% with revenue across all 3 segments higher than both consensus and the high end of guidance. Q3 guidance ahead of street.
- Azure continues to be key growth driver – Azure continues to take share in the public cloud with revenue ahead of expectations at +50% YoY growth, a slight acceleration from last quarter.
- Op margins improved by ~400bps – better gross margins aided by an accounting change added ~200bps of this; the rest was lower op ex, 100bps of which was from cost savings due to Covid.
- CEO, Satya Nadella said, “ What we have witnessed over the past year is the dawn of a second wave of digital transformation sweeping every company and every industry. Building their own digital capability is the new currency driving every organization’s resilience and growth. Microsoft is powering this shift with the world’s largest and most comprehensive cloud platform.”
Additional Highlights:
- Revenue was $43B and +17%; Op. income of $18B +29%; Net income $15.5B, +33%; diluted EPS of $2.03 +34%
- Commercial cloud ($16.7B, +34% YoY) and gaming (+51%) had standout performance. “Commercial cloud” aggregates the cloud businesses w/in the first two segments below: Office 365, Azure, the commercial portion of LinkedIn, Dynamics 365.
- Improvement in advertising market continues to benefit Search and LinkedIn
- Gaining Ground in Security – has surpassed $10B in LTM revenue which represents growth of >40% YoY.
SEGMENTS…
Productivity and Business Processes ($13.4B, +13% YoY):
- LinkedIn – growth accelerated, revenues +23%. LinkedIn advertising business had a record quarter accounting for >1/3 of LinkedIn’s total rev.
- Office 365 Commercial (rev +21%)- driven by installed base expansion as well as higher ARPU. Strong demand for security, compliance, and voice components, drove E5 revenue growth acceleration again this quarter – that’s the highest license tier.
- Dynamics 365 (rev +39%) – helping organizations in every industry digitize their end-to-end business operations from sales and customer service to supply chain management. L’Oréal is using Dynamics 365 Remote Assist and HoloLens to help technicians to repair equipment at factories when they cannot travel.
- Teams continues to shine – they have 60m daily active users on mobile alone. Teams advantage is its broad integrated user experience. The fact that it’s sold bundled w/ MSFT’s other productivity offerings and its interoperability are key to its positioning. For example, Dynamics 365 can connect to Teams so that you can incorporate customer information and analytics. Teams is about actually getting work done where meetings and video is just one part – as such, its utility should increase w/ mixed office and WFH environment in the future. “Teams is rapidly becoming the de facto unified communications platform of choice for every organization.”
Intelligent Cloud ($14.6B, +23% YoY):
- Server products and cloud services revenue increased 26% with Azure revenue growth of 50% (48% cc). An increasing mix of large, long-term Azure contracts can drive quarterly volatility in the growth rates. Leader in hybrid cloud and have more datacenter regions than any other provider – and continuing to add data center regions, including support for “top secret classified workloads in the US.”
- Power Platform (low code/no code solution) now has more than 11 million monthly active users, up 95% YoY. Enables non-developers in an organization to build applications, automate processes, create Virtual Agents and analyze data. The city of Kobe in Japan, is relying on Power Virtual Agents and Power Automate to keep citizens informed, building intelligent bots to answer frequently asked questions. Their vaccine registration and administration solution built on Power Platform enables governments to manage the end-to-end process from screening and scheduling to administration and follow-up.
More Personal Computing ($15.1B +14% YoY):
- Gaming grew 51% – with hardware up +86% and Xbox content and services revenue up +40%. Xbox LIVE has > 100 million monthly active users and Game Pass now has ~18 million subs. They are taking share in consoles…console demand significantly exceeded supply following the Xbox Series X and S launches.
- Surface +3%, saw big deceleration in growth
- Improvement in Windows OEM revenue to +1% from -5% driven by PC demand – this is despite a difficult compare lapping end of support for Windows 7.
Rev Guidance:
- Productivity & Business Processes $13.35-13.6B vs street $12.9B
- Intelligent Cloud $14.7-14.95B vs street $14.09B
- Personal Computing $12.3-12.7B vs street $11.59B
Valuation:
- Free cash flow for the quarter was $8.3B, up 17%. Returned $10B to shareholders in repurchases and dividends, an increase of 18% YoY.
- 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 trading at >3% forward FCF yield.
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]