Microsoft Earnings: Cloud Services Boost Revenues

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Microsoft (NASDAQ:MSFT) announced its earnings for fiscal Q4 on July 20. The company posted 9% year-over-year growth (10% in constant currency) in revenues to $24.7 billion. For the year, the company posted 5% year-over-year growth (5% in constant currency) in revenues to $96.7 billion. In our pre-earnings note, we noted that cloud services would boost revenues for the company. The Commercial Cloud annualized revenue run rate (ARR) revenue exceeded $18.9 billion, and the company is on course to achieve a $20 billion annual run rate by fiscal year 2018. The highlights from the earnings announcement are as follows:

  • Productivity and business process revenues grew by 21% to $8.4 billion. The growth in this vertical was driven by:
    • 5% growth in Office commercial product, which grew due to Office 365 commercial revenue growth of 43%.
    • 13% growth in Office consumer products as Office 365 consumer subscribers increased to 27 million.
    • 7% growth in Dynamics products and cloud services as Dynamics 365 revenue grew by 74%
  • Intelligent Cloud revenue grew by 11% to $7.4 billion, due to the following factors:
    • 15% growth in Server products and Cloud services driven by growth in Azure revenue, which increased by 97%
    • Enterprise Services revenue decreased by 3%
  • Personal Computing revenues declined by 2% to $8.8 billion, primarily due to lower phone revenues. Some revenue drivers for the vertical were:
    • 1% growth in Windows OEM revenue, as it outperformed the overall PC market, and 8% growth in Windows commercial products
    • Higher revenue per search and search volume drove 10% growth in search advertising revenues.
    • Surface revenue declined by 2% as the product transition is underway.
    • Strength in Xbox software and services offset lower hardware revenue and drove gaming revenues 3% higher.

Some key takeaways from the earnings:

  • Cloud services continue to boost the Productivity division, and will continue to drive revenues in the coming quarters as the company strives to book $20 billion in Cloud ARR in 2018.
  • Microsoft is focusing on LinkedIn and Dynamic to develop a credible cloud-based CRM software to develop a cross-selling platform.
  • Azure is fast emerging as a platform for Microsoft’s clients for Infrastructure as a Service (IaaS) and Platform as a Service (PaaS), as evidenced by the ~100% growth in revenues. It is looking to catch up with Amazon Web Services.
  • Windows continues to outperform the PC market as the installed base swelled to over 500 million. With many OEMs coming out with new Windows hardware, Windows sales are expected to continue to outperform PC sales.
  • While hardware revenues declined during the quarter, the product refresh for Surface and content sales for Xbox will drive revenues in the coming quarter.
  • Bing’s share in the search ad market has improved as it has been able to leverage its partnerships with third party websites to drive search queries on its platform.

We currently have a $65 price estimate for Microsoft, which is around 10% below the current market price.

See our complete analysis of Microsoft here

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