Microsoft (MSFT) Q1 Earnings & Revenues Beat on Cloud Strength
Microsoft MSFT reported first-quarter fiscal 2024 earnings of $2.99 per share, which beat the Zacks Consensus Estimate by 12.83% and improved 27.2% on a year-over-year basis. At constant currency (cc), earnings grew 26% year over year.
Revenues of $56.51 billion increased 12.8% year over year and beat the Zacks Consensus Estimate by 3.9%. At cc, revenues rose 12% year over year.
Commercial bookings increased 14% and 17% at constant currency, in line with expectations, primarily driven by strong execution across core annuity sales motions with continued growth in the number of $10 million-plus contracts for both Azure and Microsoft 365.
Commercial remaining performance obligation increased 18% to $212 billion. Roughly 45% will be recognized in revenues in the next 12 months, up 15% year over year. The remaining portion, which will be recognized beyond the next 12 months, increased 20%.
Microsoft Cloud revenues were $31.8 billion, up 24% (up 23% at cc) year over year, driven by the improvement in Azure as well as Office 365, partially offset by the impact of scaling the company’s artificial intelligence (AI) infrastructure to meet growing demand.
In commercial business, the company witnessed healthy renewals, particularly in Microsoft 365 E5, and the growth of new business continued to be moderated for standalone products sold outside the Microsoft 365 suite. In Azure, as expected, the optimization trends were similar to the fourth quarter. Higher than expected AI consumption contributed to revenue growth in Azure.
Azure’s year-over-year top-line growth rate of 29% (up 28% at cc) was higher than 26% (up 27% at cc) reported in the previous quarter. Microsoft now expects Azure to grow between 26% and 27% at cc in the second quarter of fiscal 2024, with increasing contributions from AI. Microsoft expects Office 365 revenue growth to be roughly 16% at constant currency.
In the consumer business, PC market unit volumes are returning to pre-pandemic levels. Advertising spend came roughly in line with expectations. Strong engagement helped by the Starfield launch benefited Xbox content and services in Gaming.
Microsoft completed the acquisition of Activision Blizzard on Oct 13, 2023.
Microsoft Corporation Price, Consensus and EPS Surprise
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Segmental Details
The Productivity & Business Processes segment, which includes the Office and Dynamics CRM businesses, contributed 32.9% to total revenues. Revenues increased 12.9% (up 12% at cc) on a year-over-year basis to $18.59 billion and beat the consensus mark by 2.33%.
Office commercial products and cloud services revenues grew 15% (up 14% at cc). Office 365 commercial revenues increased 18% (up 17% at cc). This rise continues to be driven by healthy renewal execution and ARPU growth as E5 momentum remains strong.
Paid Office 365 commercial seats grew 10% year over year with installed base expansion across all customer segments. Seat growth was driven by small and medium business and frontline worker offerings, with continued impact from the growth trends in new standalone business.
Office commercial licensing declined 17% year over year, in line with the continued customer shift to cloud offerings.
Office Consumer products and cloud services revenues increased 3% (up 4% at cc). Microsoft 365 Consumer subscribers grew to 76.7 million in the reported quarter, up 18% year over year.
Dynamics products and cloud services revenues grew 22% (up 21% at cc) because of Dynamics 365, which grew 28% (up 26% at cc). LinkedIn revenues increased 8% Year over year, ahead of expectations, driven by slightly better-than-expected performance across all businesses.
The Intelligent Cloud segment, including server and enterprise products and services, contributed 42.9% to total revenues. The segment reported revenues of $24.3 billion, up 19.4% year over year and beat the consensus mark by 3.47%.
Server products and cloud services revenues increased 21%, driven by Azure and other cloud services revenue growth of 29% (up 28% at cc), including roughly 3 points from AI services.
In per-user business, the enterprise mobility and security installed base grew 11% to more than 259 million seats. In the on-premises server business, revenues rose 2% year over year.
In terms of cloud migration, Microsoft witnessed increasing momentum with Azure Arc, which now has 21,000 customers, up 140% year over year, including Carnival, Domino’s and Thermo Fisher.
MSFT also witnessed solid momentum across Azure OpenAI Service, which now has a clientele of more than 18,000 organizations across industries, including new-to-Azure customers.
In the first quarter, Microsoft announced support for Meta Platform’s META Llama 2 on Azure and Windows, as well as OpenAI. Meta and Microsoft seek to provide an open approach to AI development, which benefits companies by enabling innovation, collaboration and transparency. They have been working together for more than a decade on various AI initiatives, such as PyTorch, the partnership on AI and the metaverse.
The company is the only other cloud provider to run Oracle’s ORCL database services, making it simpler for customers to migrate their on-premise Oracle databases to Microsoft Cloud. Customers like PepsiCo PEP and Vodafone will have access to a seamless, fully integrated experience for deploying, managing and using Oracle database instances on Azure.
Microsoft Intelligent Data Platform is bringing together operational data stores, analytics and governance. More than 73% of the Fortune 1000 use three or more of MSFT’s data solutions.
Microsoft Fabric is also gaining momentum in unifying compute, storage and governance into one end-to-end analytical solution with an all-inclusive business model. More than 16,000 customers are actively using Fabric, including over 50% of the Fortune 500.
On the developer side, Microsoft is increasing developer productivity by up to 55% with GitHub Copilot. The company has registered more than one million paid Copilot users. More than 37,000 organizations have subscribed to Copilot for Business, up 40% quarter over quarter, with significant traction outside the United States.
Microsoft has added new capabilities with GitHub Copilot Chat, which are already being used by digital natives like Shopify, as well as leading enterprises, such as Maersk and PwC, to supercharge the productivity of its software developers.
More than 126K organizations, including 3M, Equinor, Lumen Technologies, Nationwide, PG&E, Toyota, have used Copilot in Power Platform to date. EY, for example, has enabled Copilot for all 170,000-plus Power Platform users at the company.
More than 320 million monthly active users are making Teams the place to work across chat, collaboration, meetings and calling. Microsoft has introduced a new version of Teams that is up to two times faster while using 50% less memory and includes seamless cross-tenant communications and collaboration.
MSFT witnessed the ninth consecutive quarter of triple-digit revenue growth for Teams Rooms. More than 10,000 paid customers now use Teams Premium. Teams Store has more than 2,000 apps and collaborative apps from Adobe, Atlassian and Workday have each exceeded one million monthly active users on Teams.
Enterprise Services revenues increased 1%, driven by growth in Enterprise Support Services.
More Personal Computing segment, which primarily comprises Windows, Gaming, Devices and Search businesses, contributed 24.2% to total revenues. Revenues increased 2.5% year over year (up 2% at cc) to $13.66 billion but beat the Zacks Consensus Estimate by 6.99%.
Windows revenues increased 5%, with Windows OEM revenue growth of 4%. Windows Commercial products and cloud services revenues grew 8%, driven by demand for Microsoft 365 E5. Devices revenues decreased 22%.
Microsoft rolled out the biggest update to Windows 11, adding 150 new features, including new AI-powered experiences in apps like Clipchamp, Paint and Photos.
Search and news advertising revenues, excluding traffic acquisition costs, grew 10% (up 9% at cc), driven by increased engagement on Bing and Edge. Bing users have engaged in more than 1.9 billion chats. Microsoft Edge has gained shares for 10 consecutive quarters.
Gaming revenues grew 9% (up 8% at cc). Xbox content and services revenues increased 13% (up 12% at cc). Xbox hardware revenues decreased 7% (down 9% at cc).
Microsoft released Starfield in the reported quarter, which has registered more than 11 million players to date. Minecraft has now surpassed 300 million copies sold.
Operating Results
Gross profit increased 16% year over year to $40.2 billion. The gross margin expanded 200 basis points (bps) to 71.2% on a year-over-year basis. Microsoft Cloud gross margin percentage increased roughly 2 points year over year to 73%.
Operating expenses increased 1.3% year over year to $13.3 billion, driven by marketing, LinkedIn and cloud engineering, partially offset by Devices.
Operating income was $26.8 billion, up 25% (up 24% at cc) on a year-over-year basis. The operating margin expanded 470 bps on a year-over-year basis to 47.6%.
Productivity & Business Process operating income rose 19.8% to $9.97 billion, beating the Zacks Consensus Estimate by 9.22%.
Intelligent Cloud operating income increased 30.9% to $11.7 billion, beating the consensus mark by 14.29%.
More Personal Computing’s operating income increased 22.7% to $5.17 billion, which beat the consensus mark by 20.67%.
Balance Sheet & Cash Flow
As of Sep 30, 2023, Microsoft had total cash, cash equivalents and short-term investments balance of $143.9 billion compared with $111.3 billion as of Jun 30, 2023.
As of Sep 30, 2023, long-term debt (including the current portion) was $67.7 billion compared with $47.2 billion as of Jun 30, 2023.
Operating cash flow during the reported quarter was $30.5 billion compared with $28.8 billion in the previous quarter. Free cash flow during the quarter was $20.7 billion, up 22% year over year.
In the reported quarter, the company returned $9.1 billion to shareholders in the form of share repurchases ($4.83 billion) and dividends payouts ($5.05 billion).
Guidance
For the fiscal second quarter, Microsoft expects the cost of revenues between $19.4 billion and $19.6 billion and operating expenses to grow in the $15.5 to $15.6 billion range. Other income and expenses are expected to be roughly $500 million.
Microsoft expects revenue growth in the productivity and business processes segment between $18.8 billion and $19.1 billion.
Microsoft expects Office 365 Commercial revenue growth to be roughly 16% at cc. Office Commercial products revenues are expected to decline in mid to high-teens.
In Office Consumer products and cloud services, Microsoft expects revenue growth in mid-single digits. For LinkedIn, the company expects revenue growth in mid-single-digits. In Dynamics, MSFT expects revenue growth in high-teens.
For Intelligent Cloud, the company anticipates revenues between $21.5 billion and $25.4 billion.
In Azure, Microsoft expects revenue growth to be 26-27% at cc. In Enterprise Services, revenues are expected to decline in the low to mid-single-digits range. Server revenues are expected to remain roughly flat year over year.
For More Personal Computing, the company projects revenues between $16.5 billion and $16.9 billion. It expects Windows OEM revenues to grow in the mid to high-single-digits range.
In Gaming, the company expects revenue growth in the mid to high 40s. This includes roughly 35 points of net impact from the Activision acquisition. Microsoft expects Xbox content and services revenue growth in the mid to high 50s, driven by roughly 50 points of net impact from the Activision acquisition.
For fiscal 2024, this Zacks Rank #3 (Hold) company expects approximately $900 million for purchase accounting adjustments as well as integration and transaction-related costs in each quarter in the second half of 2024 related to Activision’s acquisition. The company expects foreign exchange to have no meaningful impact to full-year revenues, cost of goods sold or operating expense growth. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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