Microsoft Q2 2024 Earnings Analysis

Dive into $MSFT Microsoft’s Q2 2024 earnings with review of financial performance, key metrics, operating expenses, dilution, customer growth, future outlook

Financial Results:

↗️$64,727M rev (+15.2% YoY, 17.0% LQ) beat est by 0.6%

↘️GM (69.6%, -0.5%pp YoY)

↘️Operating Margin (43.1%, 0.0%pp YoY)

↘️Net Margin (34.0%, -1.7%pp YoY)

↗️EPS $2.95 beat est by 0.7%

Segment Revenue

↘️Productivity and Business Processes $20,317M rev (+11.1% YoY, 49.9% Op Margin)🟡

↘️Intelligent Cloud $28,515M rev (+18.8% YoY, 45.1% Op Margin)

➡️Personal Computing $15,895M rev (+14.3% YoY, 31.0% Op Margin)🟡

Product and Service Revenue (GAAP)

↗️Microsoft Cloud (+21% YoY)

➡️Office Commercial products and cloud services (+12% YoY)

➡️Office 365 Commercial (+13% YoY)

➡️Office Consumer products and cloud services (+3% YoY)

➡️LinkedIn (+10% YoY)

↗️Dynamics products and cloud services (+16% YoY)

↗️Dynamics 365 (+19% YoY)

↗️Server products and cloud services (+21% YoY)

↗️Azure and other cloud services (+29% YoY)

➡️Windows (+7% YoY)

➡️Windows OEM (+4% YoY)

➡️Windows Commercial products and cloud services (+11% YoY)

↘️Devices (-11% YoY)

↗️Xbox content and services (+61% YoY)

↗️Search and news advertising excluding traffic acquisition costs (+19% YoY)

Operating expenses

↗️S&M/Revenue 10.5% (10.0% LQ)

↗️R&D/Revenue 12.4% (12.4% LQ)

↗️G&A/Revenue 3.5% (3.1% LQ)

Dilution

↘️SBC/rev 4%, -0.2%pp QoQ

↗️Basic shares down 0.0% YoY, +0.1%pp QoQ🟢

↘️Diluted shares up 0.1% YoY, 0.0%pp QoQ🟢

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

AI and Cloud Investments:

Microsoft is heavily investing in AI, viewing it as a strategic transition akin to the cloud shift. This involves comprehensive enhancements in infrastructure and applications, designed to scale Microsoft's cloud business while prioritizing fundamentals like security.

Microsoft has accelerated its datacenter expansion globally, a move driven by the need to support burgeoning AI demands. This includes new data centers across four continents, ensuring Microsoft remains a competitive force in cloud services.

Microsoft Azure:

Microsoft has significantly expanded its Azure capabilities, particularly with AI. New AI accelerators from AMD and NVIDIA, along with Microsoft's first-party silicon Azure Maia, have been introduced. Additionally, the new Cobalt 100 was launched to provide top-tier performance for various customers, enhancing data handling and processing capabilities.

Azure's AI services continue to grow, with over 60,000 customers utilizing Azure AI, representing nearly a 60% increase year-over-year. Microsoft is also offering Models as a Service, providing API access to third-party models, which has seen its customer base more than double quarter-over-quarter.

GitHub Copilot Expansion:

GitHub Copilot, described as the most widely adopted AI-powered developer tool, has dramatically increased its footprint. More than 77,000 organizations have adopted Copilot, a number which represents a 180% year-over-year growth.

Microsoft 365 with AI Copilot:

Microsoft 365 has integrated AI Copilot, transforming productivity for knowledge workers by enabling more effective meetings, faster task completion, and automation of complex workflows. The AI capabilities within Microsoft 365 are also driving significant growth in user engagement and subscription expansions.

AI-Powered Dynamics 365:

Dynamics 365 has incorporated generative AI to enhance its business applications, particularly in customer relationship management (CRM) and enterprise resource planning (ERP). The new Dynamics 365 Contact Center is an AI-first solution that improves customer support workflows through AI integration.

Gaming:

The acquisition of Activision Blizzard has greatly expanded Microsoft’s gaming content, particularly in mobile and PC gaming, complementing its traditional strength in console gaming.

Microsoft's Game Pass has continued to see robust growth, with the introduction of new titles and expansions into new platforms like Amazon Fire TVs.

Security and AI:

Nadella underscored the importance of security, especially in AI deployments, highlighting that Microsoft is securing AI through updates to its Defender and Purview platforms. The security solutions now protect a broad range of customer workloads across different environments.

LinkedIn, Consumer Engagement:

LinkedIn continues to experience strong member growth and engagement, with significant revenue growth driven by LinkedIn Marketing Solutions.

CAPEX (Capital Expenditures):

A significant portion of Microsoft's capital expenditures is allocated to developing long-term assets like land and datacenters. This investment strategy is designed to support monetization over the next decade and beyond.

Challenges:

Despite strong demand, Microsoft is facing AI capacity constraints, which have impacted the ability to fully meet customer needs promptly. This has been a recurring challenge as the company scales its AI infrastructure.

Some softness in European markets has been noted, affecting non-AI Azure consumption. This regional economic challenge has slightly dampened growth expectations.

Future Expectations:

Microsoft expects to continue seeing double-digit revenue growth driven by AI and cloud products. The company plans to manage capital expenditures dynamically based on demand signals from these sectors.

Despite the heavy investments in AI and cloud, Microsoft anticipates improved margins and profitability as these technologies mature and scale.

Management comments on the earnings call.

Azure and Cloud Investments

Satya Nadella: "Our share gains accelerated this year, driven by AI. We expanded our datacenter footprint, announcing investments across four continents. These are long-term assets around the world to drive growth for the next decade and beyond."

Amy Hood: "To meet the growing demand signal for our AI and cloud products, we will scale our infrastructure investments with FY2025 capital expenditures expected to be higher than FY2024."

CAPEX

Amy Hood: "As scaling these investments drives growth in COGS, we will remain disciplined on operating expense management. Therefore, we expect FY2025 OpEx growth to be in the single digits."

GitHub

Satya Nadella: "GitHub Copilot is by far the most widely adopted AI-powered developer tool...Copilot now being bigger than even GitHub when we bought it, is already a larger business than all of GitHub was when we acquired it."

Future Expectations

Satya Nadella: "I am energized about the opportunities ahead. We are investing for the long-term in our fundamentals, in our innovation, and in our people."

Amy Hood: "We continue to expect double-digit revenue and operating income growth as we focus on delivering differentiated value for our customers."