Microsoft Earnings Preview: Cloud Division Remains Pivotal to Earnings

Tiger Newspress07-23

Intelligent Cloud remains Microsoft’s highest-growth segment and accounts for 43% of its total revenue. For Q4 2024, expectations are for the segment to grow 19.5% YoY to US$28.7 billion.

Microsoft, which just became the second company ever to reach a market capitalization of $3 trillion, is due to report its second-quarter fiscal 2024 earnings on Tuesday(July 30) after the market closes.

Analysts expect Microsoft's revenue to be $64.476 billion, adjusted net income to be $22.027 billion, and adjusted EPS to be $2.937, according to Bloomberg's unanimous expectations.

Previous Quarter Review

Microsoft’s total revenue grew 17% year over year in the quarter, which ended on March 31, according to a statement. Net income, at $21.94 billion, or $2.94 per share, was up from $18.30 billion, or $2.45 per share in the year-ago quarter.

With respect to guidance, Microsoft’s finance chief, Amy Hood, called for $64 billion in revenue for the fiscal fourth quarter, below the $64.5 billion LSEG consensus. Hood’s forecast implies an operating margin of 42.3%, ahead of the StreetAccount consensus of 41.5%.

Cloud division remains pivotal to earnings

Intelligent Cloud remains Microsoft’s highest-growth segment and accounts for 43% of its total revenue. For Q4 2024, expectations are for the segment to grow 19.5% YoY to US$28.7 billion. Previously, stronger-than-expected growth in this segment was one of the key reasons for the surge in Microsoft’s share price. During the quarter, Microsoft managed to improve its market share in the worldwide cloud infrastructure market to an all-time high of 25%, trailing just behind Amazon's Web Services (AWS) at 31%.

This leaves little room for error, given that a series of comments from Microsoft’s management team seems to anchor expectations for strong momentum in the adoption of Azure AI services to continue.

The number of Azure AI customers continues to grow, average spend continues to increase, and there is an “acceleration of revenue from migrations to Azure”. More famously, Chief Financial Officer Amy Hood said that “near-term AI demand is a bit higher than available capacity”.

Personal Computing surprised on the upside in Q3 2024, driven by better-than-expected performance in gaming and Windows OEM YoY growth may stabilise at 11.2% in Q4 2024, with expectations for recovery to continue in the low double-digit growth range.

This segment may offer stable growth of 10% YoY in Q4 2024, further underpinned by average revenue per user (ARPU) growth from continued E5 momentum and early progress with Copilot for Microsoft 365.

Sales View Likely to Be Conservative

We anticipate 2025 sales commentary to be conservative given pressure on discretionary IT spending, as recently reported by Salesforce, Workday and Accenture. Management may indicate low-double-digit sales growth in constant currency for 2025, compared with consensus of 14%.

Fiscal 2025 could be the first year that Microsoft sees some compression in adjusted operating margins after seven years of expansion. Management could signal $51.2-$53.4 billion in 2025 capital expenditures, which would be 15-20% above fiscal 2024 and 82-90% over 2023.

In the previous quarter, Microsoft guided that it expects capital expenditures to increase 'materially on a sequential basis' due to increased cloud and artificial intelligence (AI) infrastructure investments However, markets took comfort from the company’s guidance that despite the significant investments, 2024 financial year (FY) operating margins will still be up over 2 points year-on-year (YoY), while 2025 FY operating margins will be down only about 1 point YoY.

Any resilience in the company’s margins will be welcomed Market participants will also want assurance that the significant investment costs will scale into profitable features quickly, rather than being a long-term investment

What to expect

Continued growth in several product offerings will remain on watch Azure Arc, which allows its customers to run Azure services anywhere (across on-premises and multi-cloud platforms), has increased two-fold in the previous quarter to 33,000 customers.

New AI features have boosted LinkedIn premium growth, with revenue up 29% YoY previously GitHub revenue has accelerated to over 45% YoY as well, fuelled by a surge in GitHub Copilot adoption. Microsoft Fabric, which is its next-generation analytics platform, has over 11,000 paid customers; Copilot in Windows is also available on nearly 225 million Windows 10 and Windows 11 PCs, up two times quarter-on-quarter.

Mass adoption of these features is likely to persist, with investors keeping an eye on the growth progress ahead.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap
Leave a comment