Skip to main content
  • rainbow over text: 'thank you NHS'
  • Register
  • Help
  • Contact us
  • Log out of your HL account

Microsoft - a stellar quarter

Nicholas Hyett | 30 January 2020 | A A A
Microsoft - a stellar quarter

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Microsoft Corporation Com Stk US$

Sell: 183.22 | Buy: 183.28 | Change 1.85 (1.02%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

Second quarter revenues rose 14% year-on-year to $36.9bn with operating profits up 35% reaching $13.9bn. Earnings per share (EPS) rose 40% to $1.51, boosted by the group's share buyback programme. Both margins and EPS were ahead of market expectations.

Quarterly free cash flow of $7.1bn was 37.4% ahead of last year, and the group returned $8.5bn to shareholders through dividends and share buybacks.

The shares rose 3.3% in aftermarket trading.

View the latest Microsoft share price and how to deal

Our view

Microsoft's early success was built on the Windows operating system, launched back in 1985.

The group's dabbled in several other markets over the years, launching the Xbox in 2001, and acquiring professional network LinkedIn and code writing and sharing site GitHub. But new vistas are really opening up with the evolution of cloud computing.

Office 365 and Dynamics are cloud based services rather than desktop software programs, and through Azure, Microsoft provides customers with computing power on a pay-as-you-go basis. This eliminates the need for companies to pay up front for the storage and upkeep of servers. It's no surprise it's growing rapidly.

However, these clouds are grizzly and expensive rather than fluffy and carefree. Building out the infrastructure behind the system means capital expenditure is likely to stretch past $15bn this year. It was under $6bn as recently as 2015.

Still, we think there's a silver lining toa the extra costs. Massive investment requirements mean not everybody can afford a seat at the table. But with a net cash position already in excess of $60bn, and the hugely cash generative software businesses churning out operating cash flows of over $50bn a year, Microsoft is in a select group of companies that can.

In recent times it's even had enough left over to return cash to shareholders through share buybacks and dividends. The shares offer a prospective yield of 1.3%.

As things stand it looks like Cloud will be a three-way cloud 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. This could be an attractive niche, and so far customers seem to be lapping it up.

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. A price to earnings ratio of 29 is well above the group's longer term average though, so the pressure is on to deliver.

Register for updates on Microsoft

Second Quarter Results

Productivity and Business Processes saw revenues rise 17% to $11.8bn. Both Office and LinkedIn delivered strong growth as did Dynamics 365 - Microsoft's Customer Relationship Management platform. Operating profits came in at $5.2bn.

Revenues in Intelligent Cloud rose 27% to $11.9bn with Azure revenue up 62%. Operating profits in the division reached $4.5bn.

More Personal Computing revenues rose 2% to $13.2bn. Sales of the Windows operating system remain strong, with Search also doing well. However, gaming revenues fell 21%. Operating profits rose 41% to $4.2bn.

Lower costs underpinned an improvement in gross and operating margins across the business - which now stand at 66.5% and 37.6% respectively.

Capital expenditure declined slightly, which when combined with increased operating cash flow meant the group finished the half with net cash of $64.6bn compared to $61.6bn at the start of the financial year.

Find out more about Microsoft shares including how to invest

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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.