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Microsoft Reports Good Results and Mixed Guidance

Microsoft MSFT reported strong results that were once again well ahead of expectations with upside to revenue, operating margin, and EPS. We are impressed with the company's ability to continue to drive revenue and margins at the scale the company has already achieved, and we think there is more to come. Overall, results continue to reinforce our thesis, centering on customer adoption of hybrid cloud environments with Azure. Microsoft continues to use its dominant position of on premises architecture to allow customers to move to the cloud easily and at their own pace, which we believe will continue over a multiyear period. Adoption of cloud services in the form of SaaS, PaaS, and IaaS remains robust for Microsoft, and the company has passed inflection points where cloud revenue is strong and margins continue to improve. We are maintaining our $155 fair value estimate. We believe wide-moat Microsoft is firing on all cylinders and remains a relatively safe harbor in what has become a volatile software industry over the last several months.

For the September quarter, revenue grew 14% year over year to $33.1 billion, while GAAP EPS was $1.38 compared with $1.14 a year ago. Both measures were ahead of us and the Street and all three segments contributed to revenue strength. Intelligent cloud continues to drive the narrative, with Azure growing 59% year over year, which was generally in line with our expectations. On-premises server units remain strong as well, contributing 400 basis points of unrepeatable growth, bolstered by strong demand ahead of end of life support for a couple products. This tailwind will quickly become a headwind to growth. Management continues to highlight bigger deals as contributing meaningfully to revenue strength, as Microsoft enjoyed a material uptick in the number of Azure deals for $10 million or more in the quarter. In July, the company signed its largest Azure deal ever, for $2 billion.


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