Microsoft (MSFT): Strong Growth Despite Headwinds

Posted on Feb 11 2016 - 1:06pm 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. We have made this a continual feature here at Sharpe Trade with the stocks that we have mentioned in the free Sharpe Income project.

I’ve been a little ‘behind’ during this earnings season, getting caught up on posting the notes of all of the calls.  But we should do so now.  Microsoft (MSFT) recently reported earnings on January 28th, 2016.  The stocks price has dropped by approximately 3.9 % since they released earnings.  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.  I hold no Microsoft (MSFT) for valuation accounts.  This is purely a piece, a cog, in my Income accounts …

Microsoft (MSFT)
1 Hour Chart

microsoft-chart-earnings-02-11-16

So what’s ‘the low-down’ for 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 and looked over the headline numbers …

Microsoft (MSFT)– From January 28, 2016

  • $0.69(3) Est. / $0.78 in Actual EPS
  • $4.998 Billion in Net Income up 8.182% from last quarter, and down 14.71% from the same time last year.  Total Revenue of $23.7 Billion, up 17.53% from last quarter and down -10.23% from the same time last year.  So Revenue and Net Income both improved last quarter.  Somewhat to normal levels for this year, though down a little bit from last year.  
  • Operating Margin decreased slightly, to near ~16%, and Profit Margins also ~16%.
  • Earnings per share (EPS) of $0.78 or 8.7 cent beat.  Up 16.42% from last quarter, and up 9.859% from the same time last year.
  • Cash flow up from last quarter.  Dividend yield is ~2.95% with a dividend payout ratio at around 47%.
  • Debt to Assets rose slightly last quarter, to ~25%.   Assets rose, and have been rising all year.  Debt is low, though rising from ~17% from earlier in the year.  Maintains an AAA S&P Credit Rating.  Financial Leverage stands at conservative 2.2005.  
  • Analysts are all over the place.  “Research Team” has a “Reduce” and “Market Edge” has an “Avoid” rating.  S&P Capital IQ has a 3 star or “Hold” rating, along with JayWalk Consensus.  Credit Suisse has an “Outperform” rating, and Ford Equity Research and The Street” have a buy rating on the stock.
  • Commercial cloud run rate surpassed $9.4 billion, up over 70% year over year and almost halfway to goal of $20 billion.  Nearly doubled cloud customers over the last 12 months.
  • Windows 10 is outpacing adoption of any of our previous operating systems. In fact, adoption is nearly 140% faster than Windows 7.
  • Productivity and Business Process: Consumer response to Office (45.5% of Market Cap) is strong. Office attach rate is up. Office 2016 adoption is outperforming Office 2013 over the same period of time, and consumer subscriptions are up to more than 20 million  Dynamics revenue grew 11% CC (Constant Currency) with Dynamics CRM Online seat additions more than doubling year over year for the fifth consecutive quarter.
  • Intelligent Cloud:  Server products (22.6% of Market Cap) and cloud services revenue grew 10% CC.  Azure revenue grew 140% CC with revenue from Azure premium services growing nearly 3x year over year.  Over 1/3 of the Fortune 500 have chosen MSFT Enterprise Mobility solutions, up nearly 3x year over year.
  • Personal Computing:  Windows (9.6% of Market Cap) OEM revenue declined 5% in CC, outperforming the PC market, driven by higher consumer premium and mid-range device mix.  Surface revenue increased 29% CC driven by launch of Surface Pro 4 and Surface book.  Phone revenue declined 49% CC reflecting strategy change announced in July 2015.  Xbox Live monthly active users (3.7% of market cap) grew 30% year-over-year to record 48 million.
  • Key markets like Brazil, China, Japan and Russia continue to be challenging.
  • Even with continuing currency headwinds, expect commercial unearned revenue to be within the range of $18.8 billion to $19 billion.
  • Questions and Answers:  MSFT doesn’t think for example of servers as a distinct part. But it’s in fact the edge of MSFT cloud, and building for that with things like Azure Stack.   Strategy is not to compete in these constituent parts independently with different competitors, it is to bring one architecture and really drive the value for customers because of that.  If someone is Office 365 customer, they have data in Office 365, they want to build applications that tap into that data, then you use Azure, which expands growth.  Question near 36:40 “Macro’s on everyone’s mind , how are you looking at the demand environment? And how does that change your plans as you look sort of towards the back half of the year? Does any assumptions change in your mind?”  Answer:  Focus that we have here is how MSFT can best execute no matter what the macro environment turns out to be.  Focus on execution, focus on continue to drive cloud services, focus on continue to drive annuity mix. Those movements actually and as MSFT help customers transform, it’s really the best plan in the face of any uncertainty.   Other:  Move to cloud has allowed MSFT to move to a larger market.  Combines a whole bunch of different categories as well as takes something like Linux. MSFT now have the ability to take Linux workloads and run them first class and over 20% plus of Azure is Linux workloads, which was sort of a growth opportunity MSFT tapped into with the cloud which MSFT didn’t have previously. 

Simply put, FX impact on total revenue was higher than expected, and key markets such as Brazil, China, Japan and Russia continue to be challenging.  Despite this and other headwinds, growth across the business has been strong.

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