Microsoft Q1 2024 Earnings Review

$MSFT Q1'24 Results:

Financial Results:

↗️$61,858M rev (17.0% YoY, +17.6% LQ) beat est by 1.8%

↗️GM (70.1%, +0.6%pp YoY)

↗️Operating Margin (44.6%, +2.3%pp YoY)

↗️Net Margin (35.5%, +0.9%pp YoY)

↗️EPS $2.94 beat est by 3.9%

Segment Revenue

↘️Productivity and Business Processes $19,570M rev (+11.7% YoY, 51.8% Op Margin)🟡

↘️Intelligent Cloud $26,708M rev (+21.0% YoY, 46.9% Op Margin)🟢

↗️Personal Computing $15.58B (+17.5% YoY)

Product and Service Revenue (GAAP)

↗️Microsoft Cloud (+23% YoY)

➡️Office Commercial products and cloud services (+13% YoY)

➡️Office 365 Commercial (+15% YoY)

➡️Office Consumer products and cloud services (+4% YoY)

➡️LinkedIn (+10% YoY)

↗️Dynamics products and cloud services (+19% YoY)

↗️Dynamics 365 (+23% YoY)

↗️Server products and cloud services (+24% YoY)

↗️Azure and other cloud services (+31% YoY)

➡️Windows (+11% YoY)

➡️Windows OEM (+11% YoY)

➡️Windows Commercial products and cloud services (+13% YoY)

↘️Devices (-17% YoY)

↗️Xbox content and services (+62% YoY)

➡️Search and news advertising excluding traffic acquisition costs (+12% YoY)

Operating expenses

↘️S&M/Revenue 10.0% (10.1% LQ)

↗️R&D/Revenue 12.4% (11.5% LQ)

↘️G&A/Revenue 3.1% (3.2% LQ)

Dilution

↘️SBC/rev 4%, -0.2%pp QoQ

↗️Basic shares down -0.1% YoY, +0.1%pp QoQ🟢

↗️Diluted shares up 0.1% YoY, +0.2%pp QoQ🟢

Key points from Microsoft’s First Quarter 2024 Earnings Call:

Financial Performance:

Microsoft had a record third quarter with Microsoft Cloud surpassing $35 billion in revenue, marking a 23% increase. Both earnings and revenue exceeded expectations with double-digit growth.

Azure's Market Share and Infrastructure:

Azure continued to gain market share with increasing customer use of Microsoft's AI accelerators and tools.

Microsoft noted the continued growth and integration of OpenAI technologies with Azure, emphasizing that more than 65% of the Fortune 500 now use Azure OpenAI Service. This integration is key to enhancing Microsoft's AI offerings and keeping the company at the forefront of AI development.

Microsoft is continuously expanding Azure’s capabilities, especially in AI, where they partner with other industry leaders like OpenAI to provide advanced AI tools and services.

Microsoft 365 and Team Dynamics:

Microsoft 365 continues to be a strong performer with innovations driven by AI integrations. Microsoft Copilot is now broadly available, helping organizations of all sizes improve productivity and business processes.

There has been strong adoption of Microsoft 365 E5 suite, which includes advanced security and compliance capabilities.

GitHub Copilot:

Microsoft reported a significant increase in GitHub Copilot subscriptions, reaching 1.8 million paid subscribers, marking a 35% growth quarter-over-quarter. Copilot is enhancing developer productivity, which is contributing to broader platform growth.

Over 90% of the Fortune 100 companies are now using GitHub, indicating widespread acceptance and integration into the professional software development environment. GitHub's revenue growth has accelerated over 45% year-over-year.

Investment in AI and Cloud Infrastructure:

Microsoft is heavily investing in AI, planning significant capital expenditures to enhance their AI infrastructure. This includes building out data centers and other necessary infrastructure to support AI-driven operations.

The company sees AI as a critical area for future growth and is positioning itself to lead in generative AI technologies.

Customer Engagement:

Microsoft is experiencing robust customer engagement across its cloud and AI products, with a notable increase in the adoption of Azure among Fortune 500 companies.

Customers are increasingly leveraging Microsoft’s hybrid cloud offerings to facilitate their digital transformations.

Major corporations such as AT&T, Citi Group, and Honeywell are increasing their overall GitHub usage due to productivity and code quality improvements observed with GitHub Copilot.

Gaming:

Activision's inclusion contributed to a 51% increase in gaming revenue, with particularly strong performance noted for "Call of Duty" and "Diablo IV," both of which have seen significant play hours and engagement.

The acquisition allows Microsoft to offer more comprehensive gaming experiences, bringing Activision Blizzard titles to its Game Pass service and contributing to record gaming engagement.

Copilot for Security:

Microsoft introduced Copilot for Security, which integrates large language models (LLMs) with domain-specific skills informed by Microsoft's extensive threat intelligence and vast security signals. This tool provides security teams with actionable insights to improve their operations.

Future Expectations:

Microsoft anticipates continued double-digit revenue growth driven by its cloud and AI innovations.

The company is focusing on scaling its cloud and AI infrastructure to meet growing demand while maintaining cost efficiency and driving operating margin improvements.

Management comments on the earnings call.

Product Innovations & AI

Satya Nadella: "It was a record third quarter, powered by the continued strength of the Microsoft Cloud, which surpassed $35 billion in revenue, up 23%... Microsoft Copilot and Copilot stack, spanning everyday productivity, business process, and developer services, to models, data, and infrastructure, are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry."

Azure & AI

Satya Nadella: "Azure again took share, as customers use our platforms and tools to build their own AI solutions. We offer the most diverse selection of AI accelerators, including the latest from NVIDIA, AMD, as well as our own first-party silicon."

GitHub

Satya Nadella: "GitHub Copilot is bending the productivity curve for developers. We now have 1.8 million paid subscribers with growth accelerating to over 35% quarter-over-quarter and continues to see increased adoption from businesses in every industry."

Activision & Gaming

Satya Nadella: "We set third quarter records for game streaming hours, console usage, and monthly active devices. And last month, we added our first Activision Blizzard title Diablo IV to our Game Pass service."

OpenAI Partnership

Satya Nadella: "Our AI innovation continues to build on our strategic partnership with OpenAI. More than 65% of the Fortune 500 now use Azure OpenAI Service."

Microsoft 365 & Customers

Satya Nadella: "This quarter, we made Copilot available to organizations of all types and sizes from enterprises to small businesses, nearly 60% of the Fortune 500 now use Copilot and we have seen accelerated adoption across industries and geographies."

Future Expectations

Amy Hood: "We continue to focus on building businesses that create meaningful value for our customers and therefore, significant growth opportunities for years to come. In FY2025, that focus on execution should again lead to double-digit revenue and operating income growth as we scale to meet the growing demand signal for our cloud and AI products."