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    Microsoft Corp (MSFT)

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    Business Description

    Microsoft is a technology company that develops and supports a wide range of software, services, devices, and solutions aimed at empowering individuals and organizations globally. Their offerings include cloud-based solutions, operating systems, productivity and collaboration applications, server applications, business solutions, desktop and server management tools, software development tools, and video games. They also design and sell devices such as PCs, tablets, gaming consoles, and related accessories .

    1. Intelligent Cloud - Drives substantial growth with Azure and other cloud services, including server products and cloud services .
    2. Productivity and Business Processes - Includes Office 365 and LinkedIn, with Office Commercial products and cloud services showing consistent growth .
      • LinkedIn - Comprises talent solutions, advertising, sales insights, and premium consumer services, contributing significantly to the segment .
    3. More Personal Computing - Encompasses Windows, devices, and Xbox, with notable revenue increases in Xbox content and services, particularly after the Activision Blizzard acquisition .

    Q1 2025 Summary

    Initial Price$448.66June 29, 2024
    Final Price$428.02September 29, 2024
    Price Change$-20.64
    % Change-4.60%

    What went well

    • Microsoft's strategic partnership with OpenAI is driving AI leadership and growth, as both companies have benefited significantly, with Microsoft building differentiated IP and driving revenue momentum.
    • Rapid adoption of Microsoft 365 Copilot is accelerating revenue growth, with nearly 70% of the Fortune 500 now using it, and customers adopting it faster than any previous Microsoft 365 suite.
    • Microsoft's AI business is on track to reach a $10 billion annual revenue run rate, making it the fastest-growing business in the company's history, driven by strong demand for AI services.

    What went wrong

    • Microsoft is facing significant external constraints in scaling up their AI and cloud infrastructure, including data center capacity and power availability, which could impact their ability to meet demand and affect growth.
    • High capital expenditure requirements to support AI growth, including investments in data centers, power, and training infrastructure, could weigh on Microsoft's financials, especially if demand doesn't materialize as expected. ,
    • Significant investment of $13 billion in OpenAI and recognizing losses under the equity method accounting could impact Microsoft's earnings, and there may be concerns about over-reliance on OpenAI and potential tensions in the partnership.

    Q&A Summary

    1. Azure Growth Deceleration
      Q: What's causing Azure's growth deceleration beyond tougher comps?
      A: Microsoft explained that the Azure growth deceleration from 34% in Q1 to low 30s in Q2 is primarily due to supply constraints, specifically supply pushouts in AI capacity coming online later than expected. Underlying consumption growth remains stable from Q1 to Q2. They expect acceleration in the second half as supply improves.

    2. Capital Expenditure Outlook
      Q: Will CapEx growth return to align with cloud revenue growth?
      A: Microsoft stated that as demand continues to grow, CapEx growth will slow, and revenue growth will increase, bringing them closer over time. The pace depends on adoption, but over time, CapEx and revenue growth should get closer together like in the last cycle.

    3. OpenAI Partnership
      Q: How does Microsoft view its relationship with OpenAI given recent media stories?
      A: Microsoft views its partnership with OpenAI as mutually beneficial, leading to great success for both companies. They continue to invest in infrastructure for OpenAI and innovate on top of their models, resulting in products like GitHub Copilot and M365 Copilot. Microsoft is committed to growing together and meeting demand from both OpenAI and broader customers. Their investment in OpenAI is accounted under the equity method, with a total investment of $13 billion.

    4. Supply Constraints Impacting Azure
      Q: Are supply limitations affecting Azure growth in Q2?
      A: Yes, supply limitations due to third parties delivering later than expected are impacting Azure growth in Q2. The supply pushouts are mainly into the second half of the year. This constraint, along with revenue recognition benefits in Q1, affects the sequential growth difference.

    5. Copilot Adoption and Revenue Impact
      Q: How is Copilot adoption affecting financial results?
      A: Microsoft reports strong momentum with Copilot, noting it's the fastest-growing new suite in M365 history. Penetration in the Fortune 500 is significant, and customers are expanding usage. The impact of Copilot is seen in M365 Commercial revenue, but growth is somewhat masked by the addition of lower ARPU seats from frontline workers and small businesses. Going forward, the impact will be more visible in ARPU.

    6. AI Investments: Inference vs. Training
      Q: How does inference revenue factor into AI investments?
      A: Microsoft's fastest growth to $10 billion in any business is driven by AI inference revenue. They focus on real demand from enterprises and their own products like GitHub Copilot, rather than selling GPUs for others to train models. The current inference revenue funds the next cycle of training investments.

    7. Constraints in AI Investments
      Q: What are Microsoft's internal and external constraints in AI investments?
      A: Internally, capital outlay for training is limited by monetization of inference demand. Microsoft aligns training investments with Moore's Law advancements. Externally, rapid demand has led to constraints in data center capacity and power availability. They expect supply and demand to align better in the second half of the fiscal year.

    8. Evolution to Agents
      Q: How is Microsoft evolving from Copilots to agents?
      A: Microsoft has developed a system including Copilot, Copilot Studio, agents, and autonomous agents. Copilot serves as the AI UI layer, while Copilot Studio allows users to build and extend agents. Autonomous agents can operate independently but interact with Copilot when needed. This entire stack is also available as building block services in Azure.

    Guidance Changes

    Quarterly guidance for Q2 2025:

    • COGS: 11–13% or USD 21.9B–22.1B (raised from USD 19.95B–20.5B )
    • Operating Expenses: USD 16.4B–16.5B (raised from USD 15.2B–15.3B )
    • Operating Margin: expected to expand (no prior guidance)
    • Other Income and Expense: roughly negative USD 1.5B (lowered from roughly negative USD 650M )
    • Effective Tax Rate: approximately 19% (no change from approximately 19% )
    • Microsoft Cloud Gross Margin Percentage: roughly 70% (no change from roughly 70% )
    • Capital Expenditures: expected to increase (no change from expected to increase )
    • Productivity and Business Processes Revenue: expected to grow between 10% and 11% (no change from 10%–11% )
    • M365 Commercial Cloud Revenue Growth: approximately 14% (no prior guidance)
    • Intelligent Cloud Revenue: expected to grow between 18% and 20% (no change from 18%–20% )
    • Azure Revenue Growth: expected to be 31%–32% (raised from 28%–29% )
    • More Personal Computing Revenue: USD 13.85B–14.25B (no prior guidance)
    • Windows OEM and Devices Revenue: expected to decline (no prior guidance)
    • Search and News Advertising ex TAC Revenue Growth: high teens (raised from mid- to high teens )
    • Gaming Revenue: expected to decline (lowered from mid-30s growth )

    Key Metrics

    View all financials →

    Executive Team

    NamePositionStart DateShort Bio
    Satya NadellaChairman and Chief Executive OfficerFeb 2014Satya Nadella is the Chairman and Chief Executive Officer of Microsoft Corporation. He became CEO in February 2014 and Chairman in June 2021. He joined Microsoft in 1992 .
    Judson B. AlthoffExecutive Vice President and Chief Commercial OfficerJul 2021Judson B. Althoff is the Executive Vice President and Chief Commercial Officer at Microsoft. He joined Microsoft in March 2013 and was appointed to his current role in July 2021 .
    Kathleen T. HoganExecutive Vice President and Chief Human Resources OfficerJun 2023Kathleen T. Hogan is the Executive Vice President and Chief Human Resources Officer at Microsoft. She joined Microsoft in 2003 and was appointed to her current role in June 2023 .
    Amy E. HoodExecutive Vice President and Chief Financial OfficerMay 2013Amy E. Hood serves as the Executive Vice President and Chief Financial Officer at Microsoft. She was appointed CFO in May 2013 and became Executive Vice President in July 2013 .
    Takeshi NumotoExecutive Vice President and Chief Marketing OfficerOct 2023Takeshi Numoto is the Executive Vice President and Chief Marketing Officer at Microsoft. He joined Microsoft in 1997 and was appointed to his current role in October 2023 .
    Bradford L. SmithVice Chair and PresidentSep 2021Bradford L. Smith is the Vice Chair and President of Microsoft. He joined Microsoft in 1993 and was appointed to his current role in September 2021 .
    Christopher D. YoungExecutive Vice President, Business Development, Strategy, and VenturesNov 2020Christopher D. Young serves as the Executive Vice President, Business Development, Strategy, and Ventures at Microsoft. He joined Microsoft in November 2020 .

    Questions to Ask Management

    1. Given the significant capital expenditure growth required to meet AI infrastructure demand, can you elaborate on how you plan to balance these investments with expected revenue growth, and when we might see CapEx growth align more closely with cloud revenue growth?

    2. With the rising costs of training large AI models and your substantial investments in OpenAI, how do you manage the financial impact of these investments on your margins, especially considering the $1.5 billion expected loss reflected in your other income and expense line?

    3. Considering the external constraints like data center capacity and power availability that you've faced due to rapid AI demand growth, what steps are you taking to mitigate these challenges and ensure sustainable expansion without compromising on environmental commitments?

    4. As you build out your AI business towards a $10 billion annual revenue run rate, can you provide more clarity on the monetization strategies for AI products like GitHub Copilot and M365 Copilot, and how they contribute to your top-line growth versus the costs involved in providing these services?

    5. Given the reported growth in gaming and the record performance of titles like Call of Duty Black Ops 6, which was the biggest Call of Duty release ever, how do you plan to sustain this momentum in the gaming division, and what are the implications for your broader strategy, especially in integrating gaming with your AI and cloud services?

    Share Repurchase Program

    Program DetailsProgram 1Program 2
    Approval DateSeptember 14, 2021 September 16, 2024
    End Date/DurationNo expiration date No expiration date
    Total additional amount$60.0 billion $60.0 billion
    Remaining authorization$7.5 billion Not applicable yet
    DetailsMay be terminated at any time Will commence after Program 1 completion

    Past Guidance

    Q1 2025 Earnings Call

    • Issued Period: Q1 2025
    • Guided Period: Q2 2025
    • Guidance:
      1. Cost of Goods Sold (COGS): Expected to grow between 11% and 13% in constant currency, or to be between USD 21.9 billion to USD 22.1 billion .
      2. Operating Expenses: Expected to grow approximately 7% in constant currency, or to be between USD 16.4 billion and USD 16.5 billion .
      3. Operating Margin: Expected to expand .
      4. Other Income and Expense: Expected to be roughly negative $1.5 billion .
      5. Effective Tax Rate: Expected to be approximately 19% .
      6. Microsoft Cloud Gross Margin Percentage: Expected to be roughly 70% .
      7. Capital Expenditures: Expected to increase .
      8. Productivity and Business Processes Revenue: Expected to grow between 10% and 11% .
      9. M365 Commercial Cloud Revenue Growth: Expected to be approximately 14% .
      10. Intelligent Cloud Revenue: Expected to grow between 18% and 20% .
      11. Azure Revenue Growth: Expected to be 31% to 32% .
      12. More Personal Computing Revenue: Expected to be USD 13.85 billion to USD 14.25 billion .
      13. Windows OEM and Devices Revenue: Expected to decline .
      14. Search and News Advertising ex TAC Revenue Growth: Expected to be in the high teens .
      15. Gaming Revenue: Expected to decline .

    Q4 2024 Earnings Call

    • Issued Period: Q4 2024
    • Guided Period: Q1 2025 and FY 2025
    • Guidance:
      1. Microsoft Cloud Gross Margin: Expected to be roughly 70% .
      2. Capital Expenditures: Expected to increase .
      3. Productivity and Business Processes Revenue: Expected to grow between 10% and 11% .
      4. Office 365 Revenue Growth: Expected to be approximately 14% .
      5. Office Consumer Revenue Growth: Expected in the low to mid-single digits .
      6. LinkedIn Revenue Growth: Expected in the high single digits .
      7. Dynamics Revenue Growth: Expected in the low to mid-teens .
      8. Intelligent Cloud Revenue: Expected to grow between 18% and 20% .
      9. Azure Revenue Growth: Expected to be 28% to 29% .
      10. More Personal Computing Revenue: Expected to grow between 9% and 12% .
      11. Windows OEM Revenue Growth: Expected to be relatively flat .
      12. Windows Commercial Products and Cloud Services Revenue Growth: Expected in the mid-single digits .
      13. Devices Revenue Growth: Expected in the low to mid-single digits .
      14. Search and News Advertising ex-TAC Revenue Growth: Expected in the mid- to high teens .
      15. Gaming Revenue Growth: Expected in the mid-30s .
      16. COGS: Expected between USD 19.95 billion to USD 20.5 billion .
      17. Operating Expense: Expected to be USD 15.2 billion to USD 15.3 billion .
      18. Other Income and Expense: Expected to be roughly negative $650 million .
      19. Effective Tax Rate: Expected to be approximately 19% .
      20. FX Impact: Expected to have no meaningful impact .
      21. FY '25 Operating Margins: Expected to be down about 1 point .
      22. FY '25 Capital Expenditures: Expected to be higher .

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2025
    • Guidance:
      1. Productivity and Business Processes: Revenue growth expected between 9% and 11% .
      2. Office 365 Revenue Growth: Expected to be approximately 14% .
      3. On-premises Business Revenue: Expected to decline .
      4. Office Consumer Revenue Growth: Expected in the low to mid-single digits .
      5. LinkedIn Revenue Growth: Expected in the mid- to high single digits .
      6. Dynamics Revenue Growth: Expected in the low to mid-teens .
      7. Intelligent Cloud: Revenue growth expected between 19% and 20% .
      8. Azure Revenue Growth: Expected to be 30% to 31% .
      9. On-premises Server Business Revenue Growth: Expected in the low to mid-single digits .
      10. Enterprise and Partner Services Revenue: Expected to decline .
      11. More Personal Computing: Revenue growth expected between 10% and 13% .
      12. Windows OEM Revenue Growth: Expected in the low to mid-single digits .
      13. Windows Commercial Products and Cloud Services Revenue Growth: Expected in the mid-single digits .
      14. Devices Revenue: Expected to decline .
      15. Search and News Advertising ex TAC Revenue Growth: Expected in the low to mid-teens .
      16. Gaming Revenue Growth: Expected in the low to mid-40s .
      17. Xbox Content and Services Revenue Growth: Expected in the high 50s .
      18. COGS: Expected to be between USD 19.6 billion to USD 19.8 billion .
      19. Operating Expenses: Expected to be between USD 17.15 billion to USD 17.25 billion .
      20. Capital Expenditures: Expected to increase .
      21. Effective Tax Rate: Expected to be approximately 18% .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      1. FX Impact: Expected to increase revenue growth .
      2. Capital Expenditures: Expected to increase .
      3. Productivity and Business Processes Revenue: Expected to be between $19.3 billion to $19.6 billion .
      4. Office 365 Revenue Growth: Expected to be approximately 15% .
      5. Office Consumer Revenue Growth: Expected in the mid- to high single digits .
      6. LinkedIn Revenue Growth: Expected in the mid- to high single digits .
      7. Dynamics Revenue Growth: Expected in the mid-teens .
      8. Intelligent Cloud Revenue: Expected to be between $26 billion to $26.3 billion .
      9. Azure Revenue Growth: Expected to remain stable .
      10. On-premises Server Business Revenue Growth: Expected in the low to mid-single digits .
      11. Enterprise and Partner Services Revenue: Expected to decline .
      12. More Personal Computing Revenue: Expected to be between $14.7 billion to $15.1 billion .
      13. Windows OEM Revenue Growth: Expected to be relatively flat .
      14. Windows Commercial Products and Cloud Services Revenue Growth: Expected in the mid-teens .
      15. Devices Revenue: Expected to decline .
      16. Search and News Advertising ex TAC Revenue Growth: Expected in the mid- to high single digits .
      17. Gaming Revenue Growth: Expected in the low 40s .
      18. Xbox Content and Services Revenue Growth: Expected in the low to mid-50s .
      19. COGS: Expected to be between **$18.6

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Apple: Distributes versions of its pre-installed application software through its PCs, tablets, and phones .
    • Cisco Systems: Uses its position in enterprise communications equipment to grow its unified communications business .
    • Google: Provides a hosted messaging and productivity suite .
    • Meta: Offers communication tools to enable productivity and engagement within organizations .
    • Proofpoint: Provides security solutions across email security, information protection, and governance .
    • Symantec: Provides security solutions across email security, information protection, and governance .
    • Slack: Provides teamwork and collaboration software .
    • Zoom: Offers videoconferencing and cloud phone solutions .
    • Oracle: Competes with Dynamics in cloud-based and on-premises business solutions .
    • Salesforce: Competes with Dynamics in cloud-based and on-premises business solutions .
    • SAP: Competes with Dynamics in cloud-based and on-premises business solutions .
    • Service Now: Competes with Dynamics in cloud-based and on-premises business solutions .
    • UI Path: Competes with Dynamics in cloud-based and on-premises business solutions .
    • WorkDay: Competes with Dynamics in cloud-based and on-premises business solutions .

    Latest news

    Recent developments and announcements about MSFT.

    Corporate Leadership

      Leadership Change

      ·
      2 days ago

      Who is leaving? Christopher D. Young, Executive Vice President of Business Development, Strategy, and Ventures at Microsoft, has resigned effective immediately. He will remain with the company until the end of March to assist with the transition.

      Why? No specific reason for the resignation was disclosed.

      Who is stepping up? The document does not mention a replacement or interim leader for his role.