Microsoft Corporation (MSFT) Q1 2024 Earnings Call Oct. 24, 2023
Here is a summary of the Microsoft Corp Earnings Call.
Satya Nadella - Chairman & CEO
Key Points
Microsoft's Strong Start to Fiscal Year:
Microsoft started the fiscal year strongly, driven by the success of Microsoft Cloud, achieving over $31.8 billion in quarterly revenue, a 24% increase.
The company is making AI accessible to individuals and businesses through initiatives like Copilots, focusing on infusing AI throughout the tech stack to enhance productivity.
Infrastructure and Cloud Services:
Azure continues to gain market share as organizations migrate their workloads to Microsoft's cloud.
Microsoft boasts a comprehensive global cloud footprint with over 60 data centre regions and the best AI infrastructure for training and inference.
Azure AI provides access to leading AI models, and over 18,000 organizations use Azure OpenAI services.
Cloud Migrations and Partnerships:
Azure Arc facilitates cloud migrations by allowing applications to run across various environments.
Microsoft runs Oracle's database services, simplifying the migration of on-premises Oracle databases to Azure.
Leading companies like Brother Industries, Hanes, ZEISS, and ZF Group run SAP on Azure.
Data Solutions and Microsoft Fabric:
Microsoft's Intelligent Data Platform consolidates operational data stores, analytics, and governance.
More than 73% of Fortune 1000 companies use multiple Microsoft data solutions.
Microsoft Fabric unifies compute, storage, and governance for analytics, with over 16,000 active customers, including 50% of the Fortune 500.
Developer Tools and GitHub Copilot:
GitHub Copilot enhances developer productivity by up to 55% and has over 1 million paid users.
Copilot for business has gained traction with more than 37,000 organizations subscribing, including international companies.
Microsoft has expanded Copilot to Power Platform and Power Apps, driving low-code and no-code development with 20 million monthly active users.
Business Applications and Dynamics 365:
Dynamics 365 has consistently gained market share for ten consecutive quarters.
Microsoft redefines its role in business applications, focusing on Copilot-led business process transformation.
Dynamics 365 now includes Copilot features for suggested actions, content ideas, and faster access to business data.
Industry-Specific Solutions:
In healthcare, Dragon Ambient eXperience and DAX Copilot improve physician productivity.
Microsoft offers healthcare data solutions and a Microsoft Cloud for sovereignty to meet public sector data needs.
The company aims to transform the future of work by integrating Copilot into everyday tasks, collaborating via Teams, and helping employees build AI-powered work habits.
Windows and Innovation:
Windows 11 introduces AI-powered features and Copilot integration, accelerating deployments worldwide.
Windows 365 Boot and Switch simplifies personalized cloud PC access for employees.
Security remains a top priority with Security Copilot and Microsoft 365 Defender integrated with advanced AI.
LinkedIn and AI-Driven Features:
AI-driven features in LinkedIn help members learn, sell, and find jobs.
Membership growth accelerates consistently, with new features benefiting recruiters and learners.
Record engagement and knowledge sharing on the platform with millions of newsletter subscriptions and premium sign-ups.
Search, Advertising, and News:
Copilot for the Web enhances search and content creation experiences.
Microsoft Edge gains market share, and Bing introduces personalized answers and DALL-E 3 support.
AI integration into ad platforms improves connections between marketers and customer intent.
Gaming and Acquisition of Activision Blizzard King:
The acquisition of Activision Blizzard King expands Microsoft's gaming portfolio with franchises like Candy Crush, Diablo, and Halo.
Game Pass sets records for hours played per subscriber.
Exciting first-party holiday lineup includes titles like Call of Duty: Modern Warfare 3 and Forza Motorsport.
Future Innovations:
Microsoft continues to innovate and expand opportunities across consumer and commercial businesses.
The upcoming Ignite Conference will introduce over 100 new products and capabilities, including AI innovations.
The company encourages everyone to stay tuned for these developments.
Amy Hood - EVP & CFO
Key Points
Q1 Financial Performance:
Q1 revenue reached $56.5 billion, marking a 13% increase (12% in constant currency) from the previous quarter.
Earnings per share (EPS) stood at $2.99, reflecting a significant 27% increase (26% in constant currency) from the same period last year.
The company's strong fiscal year start was attributed to consistent execution by sales teams and partners, leading to share gains in various business segments.
Commercial Business:
In the commercial sector, healthy renewals, particularly in Microsoft 365 E5, contributed to revenue growth.
Azure exhibited optimization trends similar to the previous quarter, with higher-than-expected AI consumption driving revenue growth.
Commercial bookings increased by 14% (17% in constant currency) as a result of strong execution in core annuity sales motions, with continued growth in $10 million plus contracts for both Azure and Microsoft 365.
Commercial remaining performance obligation increased by 18% to $212 billion, with approximately 45% expected to be recognized in revenue within the next 12 months.
The annuity mix for the quarter was 96%, and foreign exchange (FX) had minimal impact on the results.
Microsoft Cloud Performance:
Microsoft Cloud revenue reached $31.8 billion, exceeding expectations and growing by 24% (23% in constant currency).
The gross margin percentage for Microsoft Cloud increased slightly to 73%, driven primarily by improvements in Azure.
Excluding the impact of accounting estimate changes, the gross margin percentage increased by approximately 2 points, with Azure and Office 365 driving the improvement.
Company-Wide Financial Metrics:
Company gross margin dollars increased by 16% (15% in constant currency), resulting in a gross margin percentage increase to 71%.
Excluding the accounting estimate change, the gross margin percentage increased by roughly 3 points.Operating expenses increased by only 1%, driven by cost-efficiency measures and shifts in investments to future quarters.
The company's operating income increased by 25% (24% in constant currency), leading to a 5-point year-over-year increase in operating margins, reaching 48%.
Excluding the impact of the accounting estimate change, operating margins increased by roughly 6 points.
Segment Results:
Productivity and Business Processes:
Revenue for this segment was $18.6 billion, growing by 13% (12% in constant currency), exceeding expectations.
Office 365 Commercial and LinkedIn contributed to this growth.
Office Commercial revenue grew by 15%, while Office 365 Commercial revenue increased by 18% (17% in constant currency).
Office 365 seats grew by 10% year-over-year.
Intelligent Cloud:
Revenue reached $24.3 billion, growing by 19%, surpassing expectations.
Azure and other cloud services revenue increased by 29% (28% in constant currency), with a notable contribution from AI Services.
Enterprise mobility and security installed base grew by 11% to over 259 million seats.
On-premises server business revenue increased by 2%.
More Personal Computing:
Revenue was $13.7 billion, growing by 3% (2% in constant currency), exceeding expectations.
Windows OEM revenue increased by 4%, driven by stronger-than-expected consumer channel inventory builds.
Devices revenue declined by 22%, performing ahead of expectations.
Gaming revenue increased by 9%, benefiting from subscriber growth and the Starfield launch.
Cash Flow and Shareholder Returns:
Cash flow from operations reached $30.6 billion, marking a 32% year-over-year increase.
Free cash flow was $20.7 billion, growing by 22% year-over-year.
Shareholders received $9.1 billion through share repurchases and dividends.
Q2 Outlook:
The outlook includes the net impact of the Activision acquisition.
FX is expected to increase total revenue and segment-level revenue growth by approximately 1 point.
Commercial bookings growth is expected to be relatively flat.
Microsoft Cloud gross margin percentage is projected to be up roughly 1 point.
Capital expenditures are expected to increase sequentially.
The effective tax rate for Q2 is estimated to be between 19% and 20%.
Full Fiscal Year Outlook:
Microsoft plans to invest in the cloud and AI opportunity while maintaining a focus on operating leverage.
Operating margins for the full fiscal year are expected to remain flat year-over-year despite the impact of the Activision acquisition.
Closing Remarks:
The CFO expressed confidence in achieving healthy growth in the coming year, driven by leadership in the commercial cloud and commitment to lead the AI platform wave.
Q&A followed.
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