Microsoft's first quarter revenue and profit have both come in above expectations, driven by a strong performance from the group's cloud services.
The shares rose 4% following the news.
Microsoft's come a long way since unveiling its Windows operating system back in 1985. A succession of high-margin licence fees to manufacturers and other businesses built the group into one of the most powerful in the world. These agreements are still central to the group's fortunes, but there are new vistas of opportunity opening up.
Since 2017, $34.5bn has been spent on the acquisitions of code writing and sharing site GitHub and professional network LinkedIn. The Xbox-led gaming business is growing rapidly too, and delivered revenue of $10.4bn last year.
However, Microsoft's evolution is most notable in cloud computing. Through Azure, Microsoft provides customers with computing power on a pay-as-you-go basis, eliminating the need to pay for the storage and upkeep of servers. It's no surprise it's growing rapidly.
Revenue from Azure, and fellow cloud-based systems Office 365 and Dynamics, which helps customers track business performance in real time, rose 56% last year to $23.2bn.
However, these clouds are grizzly and expensive rather than fluffy and carefree. Building out the data warehouses and other infrastructure behind the system means capital expenditure is likely to stretch past $14bn. It was under $6bn as recently as 2015.
Still, we think there's a silver lining to the extra costs. While the potential benefits of the cloud system are clear to see, the massive investment requirements mean not everybody can afford a seat at the table. With a net cash position already in excess of $50bn, plus operating cash flows of over $40bn, Microsoft is in a select group of companies that can.
As things stand it looks like being a three-way carve up. Amazon is the market leader, while Google-owner Alphabet is building its capability from a lower base. That puts Microsoft in the middle of the pack. Its focus is on making Azure an adaptable product that can sit together with any existing computing power - that's an attractive niche, although only time will tell if that proves to be the case.
The market thinks a steady core business and higher growth new ventures means Microsoft can generate impressive profit growth. We're inclined to agree, although there are no guarantees and a price to earnings ratio of 25.5, well above the group's longer term average, means the pressure is on to deliver.
The group's been returning cash to shareholders through share buybacks and dividends. The shares offer a prospective yield of 1.6% next year.
Q3 Trading details
Revenue of $30.6bn is 14% ahead of last year, or 16% ahead once currency movements are excluded. The below changes relate to constant exchange rate changes.
All of the group's main divisions reported growth, as per the following split.
- More Personal Computing, which includes Search, Gaming and Original Equipment Manufacturing, saw revenue rise 9% to $10.7bn
- Revenue from Productivity and Business Processes, including Office, LinkedIn and the rapidly growing Dynamics business, increased 15% to $10.2bn.
- Intelligent Cloud revenue rose 24% to $9.6bn, including 75% growth in Azure.
Revenue growth ensured that, despite a 2 percentage point headwind from unfavourable currency movements and most costs rising (including R&D and product and service expenses) operating profit climbed 25% to $10.3bn.
Free cash flow was $11bn, up 19% year-over-year, reflecting the timing of cash payments for property, plant and equipment. That helped the group's net cash position swell to $58.5bn, despite the distribution of $3.5bn to shareholders in the form of dividends (a $0.46 per share quarterly distribution) and $4.8bn of buybacks.
Looking ahead, the group expects revenue of $32.2bn - $32.9bn, with costs of $21.4bn- 21.7bn.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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