It has been about a month since the last earnings report for Microsoft (MSFT). Shares have lost about 3.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Microsoft due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Microsoft Q4 Earnings Beat Estimates, Revenues Rise Y/Y
Microsoft reported fourth-quarter fiscal 2023 earnings of $2.69 per share, which beat the Zacks Consensus Estimate by 5.91% and improved 20.6% on a year-over-year basis. At constant currency (cc), earnings increased 23% year over year.
Revenues of $56.19 billion increased 8.3% year over year and beat the Zacks Consensus Estimate by 1.5%. At cc, revenues increased 10% year over year.
Top-line growth was driven by improvement in Intelligent Cloud and Productivity and Business Processes, offset in part by a decline in More Personal Computing.
Commercial bookings decreased 2% and 1% at cc. Commercial remaining performance obligation increased 19% to $224 billion.
Microsoft Cloud revenues were $30.3 billion, up 21% (up 25% at cc) year over year. Azure’s year-over-year top-line growth rate of 26% (up 27% at cc) was lower than 27% (up 31% at cc) reported in the previous quarter.
Microsoft now expects Azure to grow between 25% and 26% at cc in the first quarter of fiscal 2024, including roughly 2 points from Azure AI services. Microsoft 365 suite is also expected to witness continued growth but at a moderate rate.
Segmental Details
The Productivity & Business Processes segment, which includes the Office and Dynamics CRM businesses, contributed 32.6% to total revenues. Revenues increased 10.2% (up 12% at cc) on a year-over-year basis to $18.29 billion and beat the consensus mark by 1.29%.
Office Commercial products and cloud services revenues increased 12% (up 14% at cc), driven by Office 365 Commercial revenue growth of 15% (up 17% at cc). Seat growth was 11%, driven by small and medium business and frontline worker offerings, as well as growth in revenue per user.
Office Consumer products and cloud services revenues increased 3% (up 6% at cc). Microsoft 365 Consumer subscribers grew to 67 million in the reported quarter, up 12% year over year.
Dynamics products and cloud services revenues grew 19% (up 21% at cc) because of Dynamics 365, which grew 26% (up 28% at cc). LinkedIn revenues increased 5% (up 7% at cc).
The Intelligent Cloud segment, including server and enterprise products and services, contributed 42.7% to total revenues. The segment reported revenues of $24 billion, up 15.3% (17% at cc) year over year.
Server product and cloud services revenues rallied 17% year over year (up 18% at cc). Azure and other cloud services revenues grew 26% (up 27% at cc). Server products revenues decreased 1%.
Microsoft witnessed increasing momentum with Azure Arc, which now has 18,000 customers, up 150% year over year, including Carnival, Domino’s and Thermo Fisher.
The company recently announced support for Meta Platform’s 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.
Microsoft also witnessed solid momentum across Azure OpenAI Service, which now has a clientele of more than 11,000 organizations across industries.
Microsoft has expanded its partner base with the addition of the likes of Moody’s Corporation, Snowflake and KPMG.
Moody's and Microsoft recently announced a new strategic partnership that combines the latter’s robust data and analytical capabilities and the power and scale of Microsoft Azure OpenAI Service. Snowflake is also expected to increase its Azure spending as it builds new integrations with Azure OpenAI.
Enterprise Services revenues increased 4%, driven by growth in Enterprise Support Services, offset in part by a decline in Industry Solutions (formerly Microsoft Consulting Services).
More Personal Computing segment, which primarily comprises Windows, Gaming, Devices and Search businesses, contributed 24.7% to total revenues. Revenues decreased 3.8% year over year (down 3% at cc) to $13.91 billion but beat the Zacks Consensus Estimate by 2.49%.
Windows commercial products and cloud services revenues increased 2% year over year (up 3% at cc). Windows OEM revenues were down 12% year over year. Devices revenue decreased 20% (down 18% at cc).
Search and news advertising revenues, excluding traffic acquisition costs, increased 8%, driven by higher search volume.
Gaming revenues grew 1% (up 2% at cc). Xbox content and services revenues increased 5% (up 6% at cc). Xbox hardware revenues decreased 13%, driven by the lower volume of consoles sold.
Operating Results
Gross profit increased 11.2% year over year to $39.39 billion. The gross margin expanded 180 basis points (bps) to 70.1% on a year-over-year basis.
Microsoft Cloud gross margin increased year over year to 72%.
Operating expenses increased 1.6% year over year (up 9% at cc) to $15.14 billion. Operating expense growth was driven by roughly 2 points from the Nuance and Xandr acquisitions, as well as investments in cloud engineering and LinkedIn.
Operating income was $24.25 billion, up 18.1% (up 15% at cc) on a year-over-year basis. The operating margin expanded 360 bps on a year-over-year basis to 43.2%.
Productivity & Business Process operating income rose 25.1% to $9.05 billion, beating the Zacks Consensus Estimate by 5.28%.
Intelligent Cloud operating income increased 19.5% to $10.53 billion, beating the consensus mark by 6.57%.
More Personal Computing’s operating income increased 4.1% to $4.68 billion, which beat the consensus mark by 4.95%.
Balance Sheet & Cash Flow
As of Jun 30, 2023, Microsoft had total cash, cash equivalents and short-term investments balance of $111.3 billion compared with $104.4 billion as of Mar 31, 2023.
As of Jun 30, 2023, long-term debt (including the current portion) was $47.2 billion compared with $48.1 billion as of Mar 31, 2023.
Operating cash flow during the reported quarter was $28.8 billion compared with $24.4 billion in the previous quarter. Free cash flow during the quarter was $19.8 billion, up 12% year over year.
In the reported quarter, the company returned $9.7 billion to shareholders in the form of share repurchases ($4.6 billion) and dividend payouts ($5.1 billion).
Guidance
For the fiscal first quarter, Microsoft expects the cost of revenues to be between $16.6 billion and $16.8 billion and operating expenses to grow in the $13.5-$13.6 billion range. Other income and expenses are expected to be roughly $300 million.
For the fiscal first quarter, Microsoft expects revenue growth in the productivity and business processes segment to be between $18 billion and $18.3 billion.
Microsoft expects Office 365 Commercial revenue growth to be roughly 16% at cc. Office Commercial products revenues are expected to decline in the low 20s.
In Office Consumer products and cloud services, Microsoft expects revenue growth in the low to mid-single digits. For LinkedIn, the company expects revenue growth in the low to mid-single-digit range. In Dynamics, Microsoft expects revenue growth in the mid to high-teens.
For Intelligent Cloud, Microsoft anticipates revenues between $23.3 billion and $23.6 billion.
In Azure, Microsoft expects revenue growth to be 25-26% at cc. In Enterprise Services, revenues are expected to decline in the low to mid-single digit range. Server revenues are expected to decline in the low to mid-single digit range.
For More Personal Computing, the company projects revenues between $12.5 billion and $12.9 billion, pressured by the persistent decline in the personal computer market. It expects Windows OEM revenues to decline in the low-to-mid teens range.
Microsoft expects Xbox content and services revenue growth in the mid to high-single digits.
For fiscal 2024, this Zacks Rank #3 (Hold) company expects a favorable forex impact of roughly 1 point on revenues. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
The cost of revenues is expected to be higher than the fiscal 2022 figure. Operating expenses are expected to remain low. Operating margin is expected to remain flat on a year-over-year basis.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision.
VGM Scores
At this time, Microsoft has a nice Growth Score of B, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Microsoft has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Microsoft belongs to the Zacks Computer - Software industry. Another stock from the same industry, SAP (SAP), has gained 5.9% over the past month. More than a month has passed since the company reported results for the quarter ended June 2023.
SAP reported revenues of $8.18 billion in the last reported quarter, representing a year-over-year change of +2.2%. EPS of $1.14 for the same period compares with $1.02 a year ago.
For the current quarter, SAP is expected to post earnings of $1.43 per share, indicating a change of +26.6% from the year-ago quarter. The Zacks Consensus Estimate has changed -1.8% over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for SAP. Also, the stock has a VGM Score of F.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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