Microsoft Corporation’s Cloud first dream continues to yield results propelling it to another strong earnings results in Q1 2019.
With the October stock market rout getting deeper yesterday, Microsoft’s (NASDAQ:MSFT) first-quarter FY 19 earnings results came in as welcome news for investors. Microsft delivered a big beat on both earnings and revenue numbers. Redmond, Washington-based tech power house’s non-GAAP earnings came in at $1.14 per share, 18 cents ahead of Wall Street’s estimate while revenue was a massive $1.2 billion higher than expected at $29.1 billion.
Microsoft’s transformation into a leading player in the Cloud market under Satya Nadella’s leadership continues to yield rich rewards for the company. As usual, the tech giant’s Intelligent Cloud unit was the star performer. Productivity and Business Processes revenue was up 19% to $9.8 billion while More Personal Computing revenue came in at $10.7 billion, 15% higher YoY. However, the stock market rout meant MSFT stock closed more than 5% down before the earnings results lifted the stock in the after hours.
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Azure growth decelerating, but hybrid solutions showing strong growth potential
Microsoft’s Azure cloud computing business has been a major growth driver for the company over the last few years. However, with its current size, it is very unlikely it could maintain the previous high 90% growth rates. In Q1-2019, Intelligent Cloud segment generated a revenue of $8.6 billion, a 24% YoY growth but Azure revenue growth came in at 76% only. Most analysts believe that deacceleration will continue through the fiscal year, with Azure growing in the high 70% range. Though Microsoft doesn’t disclose individual Azure business revenue separately, Stifel Nicolaus analyst Brad Redback estimates Azure revenue to be $2.83 billion in Q1. One should not read much into Azure growth slowing down as it is still better than Amazon (NASDAQ:AMZN) AWS revenue growth of 49% in the last quarter. Further, the traction received by Microsoft’s hybrid solutions is very encouraging.
Amy E. Hood, CFO of Microsoft also made a special mention about the company’s hybrid offerings stating that “Customer demand for our hybrid and cloud offerings drove the quarter“. The hybrid solutions growth potential could possibly offset the Azure growth deacceleration. As a Mckinsey survey suggests that only 60% of their surveyed companies last year have migrated less than 10 percent of their workloads into the public cloud. A Mckinsey study further suggests that hybrid solutions are the best foot forward for the large enterprises to shift their workloads to the cloud. As this provides the enterprises to “quickly take advantage of sophisticated cloud services and even move sensitive applications into the public cloud without disrupting their IT architectures and operations“.
Enterprise focus could give Microsoft an edge in the cloud market.
A study reports that 83% of enterprise workloads will be in the cloud by 2020. This further shows enterprise customers will drive the cloud market in the coming days in a big way. The above study also suggests that 66% of IT professionals have mentioned security as their greatest concern in adopting an enterprise cloud computing strategy. In yesterday’s earnings call, there was special emphasis on security with CEO Satya Nadella mentioning how they were investing heavily to make Azure the best cloud for enterprise data. He spoke at length about the security features of Azure cloud and further said “With Azure Confidential Computing, Azure is now the first cloud to provide a secure platform for protecting the confidentiality and the integrity of data while in use adding to our existing security protections to encrypt data in transit as well as in rest.”
Wedbush analyst Daniel Ives is of the view that Microsoft’s enterprise focus would ultimately give Microsoft an edge over Amazon as it can combine Azure with Office 365, Dynamics and other services to create bundles that will be more appealing to enterprises. Microsoft’s hybrid solutions popularity gives it a further advantage over its rivals. Dynamics products and cloud services revenue increased by 20% in Q1 driven by Dynamics 365 revenue growth of 51%. Server products and cloud services revenue registered a 28% YoY rise while Enterprise Services revenue increased by 6% YoY.
Microsoft stock still a good long-term buy after the earnings.
The strong balance sheet and dividend growth provide a great cushion to MSFT stock. Given the strong growth in the cloud market, Microsoft is in a prime position with its product offerings to give tough competition to market leader Amazon’s AWS. LinkedIn sessions grew by 34% in Q1 suggesting users spending more time on the platform. This gives confidence about near-term strength and long-term opportunity as customers are spending big money on recruiting services. Further, the decline in OEM non Pro revenue could be offset by the Windows revenue as large enterprise customers tend to purchase the premium version of the OS. The management guided More Personal Computing revenue to be in between $12.8 billion and $13.2 billion.
The valuation concerns have been doing the rounds for a while and we have discussed in length about these concerns in our earlier posts. Despite the high valuation multiple, Microsoft stock now has lower risks and better growth prospects. The Cloud focus along with sound fundamentals make MSFT stock a great dividend + growth play now. All in all Microsoft stock still looks a good long-term buy after the earnings.