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    Microsoft Corp (MSFT)

    Q4 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$423.95March 30, 2024
    Final Price$446.95June 30, 2024
    Price Change$23.00
    % Change+5.43%

    What went well

    • Microsoft's Generative AI offerings, such as M365 Copilot, are experiencing rapid growth, with customers purchasing more seats and high adoption rates, making it the fastest-growing suite in M365 history. The number of customers with over 10,000-plus seats doubled quarter-over-quarter. ,
    • Strong demand for Azure AI services is driving growth, despite capacity constraints. Microsoft is investing in capital expenditures and partnering with third parties like Oracle to extend Azure's AI capabilities, indicating confidence in future growth. , ,
    • Microsoft's Gaming division has significant growth potential, especially after the Activision acquisition, providing a broad content portfolio across console, PC, and mobile platforms. With over 500 million monthly active users, the company aims to expand its gaming subscription services and monetize owned IP.

    What went wrong

    • Persistent capacity constraints in AI and Azure are expected to continue into Q4 and H1, which may limit growth opportunities. Amy Hood stated that "capacity constraints, particularly on AI and Azure will remain in Q4 and will remain in H1".
    • Softness in European geographies on non-AI consumption impacted Azure growth, contributing to revenue being at the lower end of expectations. Amy Hood mentioned "some softness we saw in a few European geos on non-AI consumption really made the difference".
    • High capital expenditures raise concerns about return on investment, with analysts questioning whether Microsoft needs to keep growing CapEx at elevated rates and whether the monetization will match these investments.

    Q&A Summary

    1. Azure Capacity Constraints
      Q: What's causing Azure growth to be at low end of guidance?
      A: Amy Hood explained that Azure revenue grew by 30%, hitting the low end of their guidance due to softness in some European geographies on non-AI consumption. She noted that capacity constraints, particularly on AI and Azure, will remain in Q4 and the first half of the year.

    2. CapEx Investments & AI Demand
      Q: How does CapEx relate to AI demand and cloud growth?
      A: Satya Nadella stated that CapEx spend is driven by demand signals, with over 60% of the spend on equipment purchased only if there is demand. Amy Hood mentioned that roughly half of FY24's total CapEx is on land, build, and finance leases, which are monetized over 15 years and beyond. They manage CapEx to capture opportunities with the right product portfolio.

    3. Margins Impact from AI Investments
      Q: How will AI investments affect margins near term and long term?
      A: Amy Hood noted that margins are improving faster with AI than in the last cloud cycle because they're building a consistent platform used both internally and with customers. This approach makes margins start off better and scale consistently.

    4. Meeting Demand Amid Capacity Constraints
      Q: Can you grow revenue without escalating CapEx?
      A: Amy Hood confirmed they can see consistent revenue growth without elevated CapEx numbers, as they can throttle CPU and GPU investments based on demand signals. Satya Nadella added that it's important to manage CapEx spend across land, network, construction, and equipment, adjusting based on demand.

    5. AI Partnerships for Capacity
      Q: What's the strategy around AI partnerships to address capacity?
      A: Amy Hood explained they have signed with third parties like Oracle to extend the Azure platform due to AI capacity constraints. Satya Nadella added that purchasing capacity from partners like Oracle may be more efficient due to shorter leases.

    6. Copilot's Broader Productivity Gains
      Q: Can Copilots replicate developer productivity gains for all workers?
      A: Satya Nadella believes the productivity gains seen with GitHub Copilot for developers will extend to knowledge and frontline workers through M365 Copilot. Customers are adopting Copilot rapidly, with the number of customers with 10,000-plus seats doubling quarter-over-quarter.

    7. Azure Growth Factors
      Q: Were there unusual factors affecting Azure growth?
      A: Amy Hood mentioned that apart from slight softness in Europe and capacity constraints, there were no unusual factors; commercial bookings were better than expected. The Azure growth reflects demand signals and constraints.

    8. Gaming Growth Potential
      Q: How should investors view long-term growth in gaming?
      A: Satya Nadella said their investment in gaming aims to have content across console, PC, and mobile, expanding their reach to where people play games. Amy Hood added that they're building a software annuity and subscription business with enhanced transactions and ownership of IP, which is valuable long term.

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