Earnings Update: Microsoft Q4

Microsoft had another great quarter (color me surpised):

Revenue was $56.2 billion and increased 8% (up 10% in constant currency)
Operating income was $24.3 billion and increased 18% (up 21% in constant currency)
Net income was $20.1 billion and increased 20% (up 23% in constant currency)
Diluted earnings per share was $2.69 and increased 21% (up 23% in constant currency)

Segment Performance

Productivity and Business Processes

Revenue in Productivity and Business Processes was $18.3 billion and increased 10% (up 12% in constant currency), with the following business highlights:

Office Commercial products and cloud services revenue increased 12% (up 14% in constant currency) driven by Office 365 Commercial revenue growth of 15% (up 17% in constant currency)
Office Consumer products and cloud services revenue increased 3% (up 6% in constant currency) and Microsoft 365 Consumer subscribers grew to 67.0 million
LinkedIn revenue increased 5% (up 7% in constant currency)
Dynamics products and cloud services revenue increased 19% (up 21% in constant currency) driven by Dynamics 365 revenue growth of 26% (up 28% in constant currency)

Intelligent Cloud

Revenue in Intelligent Cloud was $24.0 billion and increased 15% (up 17% in constant currency), with the following business highlights:

Server products and cloud services revenue increased 17% (up 18% in constant currency) driven by Azure and other cloud services revenue growth of 26% (up 27% in constant currency)

An amazing quarter for Azure. I’m not sure what else to say. I think the cloud is going to be a huge part of the future, and Microsoft is in a great position to capitalize on this.

While the Intelligent Cloud did not grow as much as I had predicted, I’m not worried about it.

More Personal Computing

Revenue in More Personal Computing was $13.9 billion and decreased 4% (down 3% in constant currency), with the following business highlights:

Windows OEM revenue decreased 12%
Devices revenue decreased 20% (down 18% in constant currency)
Windows Commercial products and cloud services revenue increased 2% (up 3% in constant currency)
Xbox content and services revenue increased 5% (up 6% in constant currency)
Search and news advertising revenue excluding traffic acquisition costs increased 8%

A lot of this goes in line with my assumptions in the Microsoft model:

The intelligent cloud business segment growth is just amazing. There’s a lot of talk about the slowing growth of the sub-sector of cloud computing, but I think we are in the beginning phases of seeing just how powerful this area can be. From here on I expect the growth in cloud to be sticky and robust.

Key Metrics

One of the key metrics I personally use for Microsoft is innovations per quarter. Most of these innovations are small, but over time the evolution proves to be quite powerful. Here is a list of all the major innovations Microsoft has released in the past quarter (published by Microsoft):

Microsoft Q4 product list

16 pages of innovations is nothing to sneeze at, especially when you consider the fact that Microsoft has been doing this for decades.

The other key metric I track is R&D spend, as this is the main leading indicator that sets Microsoft apart from its competitors.

Every quarter Microsoft delivers hundreds of products, either as new releases, services, or enhancements to current products and services. These releases are a result of significant research and development investments, made over multiple years, designed to help customers be more productive and secure and to deliver differentiated value across the cloud and the edge.

This is the key to Microsoft’s success.

Research and development expenses decreased $110 million or 2% driven by a decline in Devices, offset in part by investments in LinkedIn.

Seeing Microsoft save where they can while not skimping on the R&D is a good sign.

Management Commentary and Guidance

MSFT does not guide for the full year but provided some general thoughts on FY24. With the weaker US dollar and assuming current rates remain stable, co expects FX to increase full year revenue growth by approximately 1 point with the impact being greater in 1H than 2H. Revenue growth from its commercial business will continue to be driven by Microsoft Cloud and will again outpace growth from its consumer business. Even with strong demand, growth from its AI services will be gradual as Azure AI scales and Copilots reach general availability dates.
To support Microsoft Cloud growth and demand for its AI platform, MSFT plans to accelerate investment in its cloud infrastructure in FY24. Co expects cap-ex to increase sequentially each quarter through the year. Increased capital spend will drive higher COGS growth than in FY 2023. As such, co expects full year operating margins to remain flat year-over-year.
Co expects devices revenue will decline in the mid-30s due to the overall PC market and adjustments made in its portfolio with an increased focus on higher-margin premium products. And in gaming, co expects revenue growth in the mid-single digits.

TLDR: Microsoft is going to continue to dominate the cloud and AI space, and they’re going to continue to invest in their infrastructure to support this growth.

Fun fact: after trialing Github Copilot, I moved over my workflow to VSCode to utilize this tool. It’s a game changer.

Conclusion

I’m not looking for blowout quarters, but steady improvement and steady growth from the best companies in the world. Microsoft is in a great position to capitalize on the cloud and AI space, and they’re doing just that. All the while, they enjoy downside protection by being heavily embedded in the worldwide economy.

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