A month has gone by since the last earnings report for Microsoft (MSFT). Shares have added about 7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Microsoft due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Microsoft Beats on Q1 Earnings, Expects Slow Azure Growth
Microsoft reported first-quarter fiscal 2023 earnings of $2.35 per share, which beat the Zacks Consensus Estimate by 2.62% and climbed 3.5% on a year-over-year basis.
Revenues of $50.1 billion increased 10.6% year over year and beat the Zacks Consensus Estimate by 1.32%. On a non-GAAP basis, revenues increased 11% year over year and at constant currency (cc), revenues increased 16% year over year.
Commercial bookings declined 3% year over year and increased 16% in cc on a flat expiry base. Excluding the FX impact, growth was driven by strong renewal execution and an increase in the number of larger, long-term Azure contracts.
Commercial remaining performance obligation increased 31% year over year and 34% at cc to $180 billion. Roughly 45% will be recognized in revenues in the next 12 months, up 23% year over year. The remaining portion, which will be recognized beyond the next 12 months, increased 38% year over year.
Microsoft Cloud revenues were $25.7 billion, up 24% (up 31% in cc) year over year, driven by healthy demand across commercial businesses.
The Productivity & Business Processes segment, which includes the Office and Dynamics CRM businesses, contributed 32.8% to total revenues. Revenues increased 9.5% (up 15% at cc) on a year-over-year basis to $16.5 billion.
Office Commercial products and cloud services revenues rose 7% (up 13% at cc) on a year-over-year basis. Office Commercial products revenues declined 28% (down 22% at cc) due to continued customer shift to cloud offerings.
Office 365 commercial revenues rallied 11% (up 17% at cc), driven by Office 365 Commercial seat growth of 14%. Continued momentum in the small and medium businesses, as well as in frontline worker offerings, drove top-line growth. Revenue per user grew in the reported quarter.
Office Consumer products and cloud services revenues rose 7% (up 11% at cc), driven by growth in Microsoft 365 consumer subscription revenues. Microsoft 365 Consumer subscribers totaled 61.3 million, up 13% year over year.
Dynamics products and cloud services business increased 15% (up 22% at cc) year on year. Dynamics 365 revenues surged 24% (up 32% at cc).
LinkedIn revenues advanced 17% from the year-ago quarter’s levels (up 21% at cc), driven by continued strength in Marketing Solutions and better-than-expected performance in Talent Solutions. LinkedIn sessions grew 24% with record engagement.
The Intelligent Cloud segment, including server and enterprise products and services, contributed 40.6% to total revenues. The segment reported revenues of $20.3 billion, up 20.2% (26% at cc) year over year.
Server product and cloud services revenues rallied 22% year over year (up 28% at cc). The high point was Azure and other cloud services revenues, which surged 35% year over year (up 42% at cc). The upside was driven by robust growth in consumption-based businesses.
Server products revenues remained relatively unchanged year over year (up 4% at cc), driven by demand for hybrid solutions and Nuance, partially offset by a prior-year comparable that included the benefit from an increase in multi-year agreements carrying higher in-quarter revenue recognition.
Enterprise mobility installed base rallied 18% to more than 232 million seats.
Enterprise service revenues increased 5% (up 10% at cc) in the reported quarter, owing to growth in Enterprise Support Services.
More Personal Computing segment, which primarily comprises Windows, Gaming, Devices and Search businesses, contributed 26.6% to total revenues. Revenues decreased 0.3% year over year (up 3% at cc) to $13.3 billion due to a decline in Windows, partially offset by growth in Search and news advertising.
Windows commercial products and cloud services revenues increased 8% year over year (up 15% at cc) on the back of higher customer adoption of Microsoft 365 offerings.
Windows OEM revenues were down 15% year over year due to a deteriorating PC market, partially offset by 5 points of positive impact from the prior year Windows 11 revenue referral.
Search and news advertising revenues, excluding traffic acquisition costs (TAC), increased 16% (up 21% at cc), driven by higher search volume and Xandr.
Gaming revenues grew 4% at cc. Xbox content and services revenues decreased 3% (up 1% at cc) due to a decline in third-party and first-party content with lower engagement hours and higher monetization, offset in part by growth in Xbox Game Pass subscriptions. Xbox hardware revenues increased 13% (up 19% at cc).
Xbox content and services revenues were down 3% year over year (up 1% at cc).
Gross profit increased 9.5% year over year to $34.6 billion. The gross margin was 69.2%, down 70 basis points (bps) on a year-over-year basis.
Microsoft cloud gross margin increased roughly 2 points year over year to 73%. Excluding the impact of the change in accounting estimate for useful lives, Microsoft Cloud gross margin percentage decreased roughly 1 point due to a sales mix shift to Azure and lower Azure margin, primarily due to higher energy costs.
Operating expenses increased 15% year over year (up 18% at cc) to $13.1 billion as a result of investments in cloud engineering, LinkedIn, Nuance and commercial sales.
Operating income increased 6% year over year (up 15% at cc). The operating margin contracted 170 bps on a year-over-year basis to 42.9%.
Productivity & Business Process operating income rose 9.8% to $8.3 billion. Intelligent Cloud operating income increased 16.9% to $8.9 billion. More Personal Computing operating income declined 15.3% to $4.2 billion.
Balance Sheet & Cash Flow
As of Sep 30, 2022, Microsoft had total cash, cash equivalents and short-term investments balance of $107.2 billion, compared with $104.7 billion as of Jun 30, 2022.
As of Sep 30, 2022, long-term debt (including the current portion) was $48.5 billion compared with $49.7 billion as of Jun 30, 2022.
Operating cash flow during the reported quarter was $23.1 billion compared with $24.6 billion in the previous quarter. Free cash flow during the quarter was $16.9 billion compared with $17.7 billion in the prior quarter.
In the reported quarter, the company returned $9.7 billion to shareholders in the form of share repurchases ($5.5 billion) and dividends payouts ($4.6 billion).
For the fiscal second quarter, Microsoft guided a slowdown in its cloud computing business as large customers pause their spending in the face of a slowing economy, sending its shares down 7% in after-market trading.
The cautious comment dented hopes that continued solid demand for cloud services would offset a slump in the PC market and help the world’s largest software company withstand wider pressure in the IT market.
Microsoft warned that revenue growth from Azure, the cloud computing platform that has become one of the main engines of its business, would slow by 5 percentage points in the fiscal second quarter, leaving aside the effect of currency movements.
For the fiscal second quarter, Microsoft expects revenue growth in the productivity and business processes segment between 11% and 13% in cc to a range of $16.6 billion and $16.9 billion.
For Intelligent Cloud, Microsoft anticipates revenues in constant currency to increase between 22% and 24% to a range of $21.25 billion and $21.55 billion. The company sees Azure constant currency growth to decelerate 5 percentage points sequentially.
For more personal computing, the company projects revenues between $14.5 billion and $14.9 billion, pressured by the sharp decline in the personal computer market. The company sees Windows OEM revenues down in the high 30s.
Microsoft expects Xbox content and services revenues to decline in the low to mid-single digits.
Management expects the cost of revenues to be between $17.4 billion and $17.6 billion. Operating expenses are anticipated to be in the range of $14.3-$13.4 billion.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
The consensus estimate has shifted -8.86% due to these changes.
At this time, Microsoft has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren’t focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It’s no surprise Microsoft has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
Performance of an Industry Player
Microsoft is part of the Zacks Computer – Software industry. Over the past month, Cadence Design Systems (CDNS), a stock from the same industry, has gained 12.4%. The company reported its results for the quarter ended September 2022 more than a month ago.
Cadence reported revenues of $902.55 million in the last reported quarter, representing a year-over-year change of +20.2%. EPS of $1.06 for the same period compares with $0.80 a year ago.
For the current quarter, Cadence is expected to post earnings of $0.91 per share, indicating a change of +11% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Cadence. Also, the stock has a VGM Score of C.
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