Microsoft (MSFT): Pumped Higher on Growth

Posted on Oct 27 2015 - 8:56am by Sharpe Trade

When I listen to the conference call of a company, I take some notes. And therefore … I thought that to help out new folks as they navigate conference calls, I would start posting my notes, as I’ve taken them. Perhaps, we can make this a continual feature here at Sharpe Trade with the stocks that we have mentioned in the free Sharpe Income project.

Microsoft (MSFT) reported earnings on the 22nd of October, after which the stock’s price rocketed higher, hard and fast.  As of today’s date, Microsoft (MSFT) has rallied about 13.16% since reporting.  As I have mentioned previously here on Sharpe Trade, this is a stock that I use in the equities section of my own personal income accounts.  It’s unfortunate that we have not yet had the opportunity to purchase Microsoft (MSFT) for the ‘Sharpe Income‘ project.  But as we have said before, there will always be another opportunity.  

Microsoft (MSFT) – Daily Chart

Microsoft-MSFT-Chart-10-26-2015

It’s been a few days since MSFT reported.  Although I took a cursory look at the numbers, I haven’t had the opportunity to sit and listen to the conference call.  Which is fine, since my holding period, my time-frame … is that of years.  So what’s ‘the skinny’ this quarter?

You can find my notes on last quarter’s earnings here, and as follows are a few notes from my desk as I listened to this quarters Conference Call

Microsoft (MSFT) – October 22, 2015

  • $0.58 Est. / $0.67 in Actual EPS.  9 cent beat.
  • $4.6 Billion GAAP in Net Income. $7.1 Billion non-GAAP.
  • Operating Revenue just $20.4 Billion GAAP, $21.7 Billion non-GAAP.
  • Earnings per share (EPS) of $0.67 up / up 24.07% percent from $0.54 a year ago, and up 8.065% from last quarter at $0.62.
  • Believe they are well on the way to 1 Billion Windows 10 on active devices.
  • Commercial Cloud:  Working toward goal, and think they can hit $20 Billion in annualized revenue RR.  Which now exceeds 8.2 Billion.
  • Office 2016 and 365:  Office (47.3% of % of market cap) commercial products and cloud services revenue grew 5% constant currency (CC) with nearly 70% CC growth across productivity offerings.  Focus on mobility of experience, collaboration.  There are now 18.2 million consumer Office 365 subscribers with about 3 million subscribers added in the quarter.  200 million downloads of Office Mobile.  1 Billion to-do lists in Wunderlist.  Large Commercial customers as well such as Kraft, GE and Louis Vuitton as well as schools and small businesses  Commercial Office 365 monthly active users grew to 60 million with 60% of install-base using premium builds.  Dynamics revenue grew 12% CC with Dynamics CRM Online enterprise installed base growing more than 3 times year over year (y/o/y).  Which moves them to cloud. 
  • Cloud: Server (21.2% of % of market cap) Products and Cloud Services revenue grew 13% on CC, with revenue from premium products and services growing double digits. Azure revenue and compute usage more than doubled y/o/y.  Thus category of Information Protection pulling from other existing services.  20 million already use premium IP services in Office 365.   Organizational Analytics market, acquisition of Volometrix for organization productivity which visualizing how differing organizational groups interact with one another both inside and outside an organization, all pulling it’s data from the Cloud.
  • Personal Computing:  Windows (10.2% of % of market cap) OEM revenue declined 6%, performing better than the overall PC market, as Windows 10 launch spurred PC ecosystem. Revenue in total was $9.4 Billion, declining 17% and 13% in CC, mainly due to changes in phone strategy.  OEM declined 6% this quarter, outperforming the PC market, and better than anticipated.  Again, as mentioned last quarter, the OEM story is the transition to Windows 10. Phone revenue declined 54% CC reflecting updated strategy.  Windows volume licensing grew 4% in CC, with annuity growth in mid single digits. Search advertising revenue excluding traffic acquisition costs grew 29% CC with Bing (1.1% of % of market cap) US market share benefiting from Windows 10 usage.  Search revenue increased to more than $1 Billion as this business reached profitability.  Xbox Live (0.7% of % of market cap) monthly active users grew 28% to 39 million.  
  • Commercial bookings growth of 2%, up 10% CC, better than expected.  Commercial un-earned revenue was $21 Billion up 3% over prior year.  Contracted not billed over $23.5 Billion. Revenue was $21.7 Billion down 7% and 2% in CC due to changes in phone business. Gross margin was down 3%, but up 3% in CC.  Operating Income grew 1% or 11% in CC.  R&D, SG&A was $7.4 billion down 7%, driven by positive currency impact (woah, finally someone not crying about currency on the dollar).    Free cash flow of $7.2 Billion, up 2%.
  • Macro remains difficult in Brazil, China, Japan and Russia.
  • FX in general as at the company level had a favorable impact on operating expenses, which declined 6%. Based on the current rates and the forecasted geographic mix of revenue, MSFT expect 4 points of negative impact on total revenue in Q2.  
  • As usage of cloud service grows, MSFT will continue to invest capital into data centers and servers globally. This quarter MSFT invested $1.5 billion to support that demand-driven growth. Other income was negative $280 million due in part to foreign currency re-measurement and interest expense. MSFT non-GAAP effective tax rate was 21%, below guided range. This was driven by the change in geographic mix of our earnings and lower nondeductible operating losses associated with phone.
  • Questions and Answers: Began at 32:47. Azure and Cloud Interaction Inflection Point:   The first question.  (My own comments:  From my brief questions with those in small business who actually use Azure day to day, this is a bang on point regarding inflection.  The accessibility and scalability that Azure brings to a business of any size to be able to get at the data, create apps for their business, and implement using cloud data cannot be underestimated.  Per the tech I talked with, before Azure, his small company would never had and the ability to do what they are doing now before Azure, simply due to cost restrictions.  But Azure allows them to do all of this.)  Satya’s comments:  I don’t know long-term whether there is a zero-sum equation, but right now and in the intermediate timeframe, we see in our case growth in both sides. And in our case the vision also we have for distributed cloud infrastructure is just that, it is distributed. So we don’t think of our server as a legacy business. I think of it as the edge of our cloud. If you look at what we are doing with SQL, we will have the ability for any customer of SQL to stretch even a single table from between their on-premise to the cloud.  But in our case there are two unique aspects. One is this true distributed hybrid. And second is we don’t think of Azure in isolation. We think about it in the combination of Office 365, Dynamics, EMS, because really it’s one cloud infrastructure first of all from a capital perspective that sort of serves all of these and there’s a virtuous cycle between all of these for our customers as well.   Cloud Margin Improvements:  Satya Nadella: “We’re very disciplined about is our capital allows us to build all of the cloud services from Office 365 to EMS to Dynamics to Azure. And that diversity of workloads long term is what lead to margin improvement. And there will be changes in seasonality from quarter to quarter, but structurally those two things, the diversity of what we are doing and how capital is utilized across all of it is I think a big structural differentiator for us.”  Adoption of Services due to the Windows 10 Transition:  Satya Nadella:  I mean I’m very, very excited obviously about what’s happening with Bing. I think Amy talked about we have a $1 billion quarter with 29% growth and good share position growth in the United States. That’s fantastic to see. But gaming is the other place where we talked about Xbox Live now that spans both console and PC. We see increased engagement because of that. We see in fact increased engagement with titles like Minecraft. So we have some high hopes for what we can achieve with engagement around Xbox Live across the console plus PC.

Simply put, Microsoft (MSFT) rocked it.

I reflect on this call, and I get a bit miffed to tell you the truth.  Nothing really directedly related to Microsoft (MSFT).  But more in regards to the state of retail investing.

Retail investors are constantly sold “fear” and it really, really aggrivates me how retail is consantly frightened with HFT “manipulation” stories and other “boogeymen” of small consequence.  We live in the golden age of being a retail investor.  The information is sitting out there for the asking.  Anything you want to know.  Technology has opened up this wonderful vista of plentiful information and transparency to retail investors.  Information you couldn’t dream of having even 12 years ago.

Do you have a question about Azure?  Just go to the Azure website.  Or ask a tech in a small business who actually uses Azure. 

The reason I am ‘ranting’ a bit here, is that not only two months ago, I was talking with a retail trader, who was trying to play the part of “the professional”.  He was actively talking “Folksy Investor Retail” garbage about Microsoft (MSFT), and his claim was that “Microsoft (MSFT) was in serious trouble with PC sales and their numbers are trash … look it up“. 

Meanwhile, in this little place I like to call … reality … all of the information is just sitting online.  If you can’t get to the call as it is happening?  Simply go to Microsoft’s (MSFT) website and look up the call at a time that is convenient for you. 

But with High Frequency Trading boogeymen stories, the typical retail investor allows himself to be put into a constant “State of Fear“.  “All is horrible“.  “All is bad“.  It breeds laziness.  Why work when you so many talking heads are telling you to be afraid due to econo-doom porn stories or the HFT boogemen?

It’s just sad.

All of this information is out there.  Just sitting there, ready to be digested at your convenience.  The only question is … will you put in the time it takes, the work, to actually sit and review and digest the information?

Anways … yes … Microsoft (MSFT) rocked it …

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