Current Price: $252 Price Target: Raising to $290 (from $255)
Position Size: 7.7% TTM Performance: 49%
Key takeaways:
- Broad beat with 19% YoY revenue growth and +31% op. income growth. All segments grew mid-teens % or higher and saw margin expansion. Despite beat, stock traded off a bit last week after hitting an all-time high ahead of earnings.
- Azure continues to be key growth driver – Azure continues to take share in the public cloud with revenue ahead of expectations at +46% YoY in constant currency. A slight deceleration from +48% last quarter.
- Teams strength – users doubled to 145M monthly active users.
- CEO, Satya Nadella said, “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.”
Additional Highlights:
- Commercial cloud ($17.7B, +33% YoY) and gaming (+50%) 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
- As organizations become increasingly digital, MSFT’s products are evolving from being primarily productivity tools to being more strategic tools. This suggests an improving value proposition to customers, which is key to the durability of their LT growth and profitability. Some examples…
- Growing their industry specific cloud presence. Introduced new industry clouds for financial services, manufacturing, and non-profits, building on existing clouds for healthcare and retail. Their pending acquisition of Nuance will increase their solutions in healthcare delivery.
- They offer the most popular tools to help developers rapidly go from idea to code and code to cloud (Visual Studio and GitHub). They help developers infuse AI into the solutions they build…”Open AI” models are trained and hosted exclusively on Azure.
- Power Platform (low code/no code solution) – enables non-developers in an organization to build applications, automate processes, create Virtual Agents and analyze data.
- Teams is evolving collaboration w/in companies and w/ clients. 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.”
- Microsoft Mesh powers shared experiences in a mixed reality platform powered by Azure. Accenture is using Mesh to build immersive virtual office experiences. https://www.youtube.com/watch?v=Jd2GK0qDtRgAs
- Azure Digital Twins – an Internet of Things (IoT) platform that creates a digital representation of real-world things, places, processes etc. to gain insights, improve products, optimize operations/costs, and create new customer experiences. Bentley Systems is building a digital twin of the city of Dublin to reimagine urban planning. PepsiCo is simulating its manufacturing processes.
- Dynamics 365 Intelligent Order Management helps companies support omnichannel fulfillment.
- With Azure Cognitive Services, organizations can build applications that see, hear, speak, search, understand, and accelerate decision-making.
- As games evolve, they are building new tools to help anyone build and sell creations on their platforms.
- Satya Nadella: “we are innovating across the entire tech stack, as we differentiate and lead in areas that will be critical to the success of every customer going forward.”
SEGMENTS…
Productivity and Business Processes ($13.6B, +15% YoY):
- LinkedIn – growth accelerated, revenues +25%, aided by strong growth in LinkedIn advertising business which is ~1/3 of LinkedIn’s total rev.
- Office 365 Commercial (rev +22%)- driven by installed base expansion as well as higher ARPU.
- Dynamics 365 (rev +45%) – helping organizations in every industry digitize their end-to-end business operations from sales and customer service to supply chain management.
- Teams continues to shine – they now have 145m daily active users.
Intelligent Cloud ($15.1B, +23% YoY):
- Server products and cloud services revenue increased 23% with Azure revenue growth of 50% (46% 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 new regions in China, Indonesia, Malaysia, as well as the US.
More Personal Computing ($13B +19% YoY):
- Gaming grew 50% – with hardware up +232% and Xbox content and services revenue up +34%. Xbox LIVE has > 100 million monthly active users and Game Pass now has ~18 million subs. Hardware growth driven by demand for new consoles.
- Surface +12%, saw big acceleration in growth from last quarter
- Search advertising revenue improved (+17% YoY ex-TAC) as companies pick up spending on digital advertising ahead of re-opening.
Valuation:
- Free cash flow for the quarter was $17.1B, up 24%. Returned $10B to shareholders in repurchases ($5.8B) and dividends ($4.2B).
- 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]