Microsoft Q2 FY2024 Earnings

By Patrick Moorhead - February 6, 2024

The Six Five team discusses Microsoft Q2 FY2024 earnings.

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Transcript:

Patrick Moorhead: Microsoft, what did they do and why does it matter?

Daniel Newman: Why does it matter? I don’t know. It was the Tayvis moment of earnings. The Tayvis, everybody knows Tayvis Kelce, Taylor Swift in case you didn’t pay attention.

Patrick Moorhead: By the way, I didn’t notice it the Friday. I didn’t get it the first time, buddy.

Daniel Newman: The Tayvis moment of technology, it was the biggest quarterly result. Everybody’s eyes were on it. And this was a mega week. It was a mega, mega week. We saw Meta crush it. By the way, Meta crushed it because they fired a lot of people. I’m just being honest. And by the way, layoffs are abundant right now, so don’t be surprised when any company is doing that. There’s a lot going on. Anyways, but look, Microsoft is a combination. It’s a juggernaut of all things. It’s consumer, it’s prosumer, it’s enterprise, it’s cloud, it’s AI, it’s PCs, it’s software, it’s applications. And so when you kind of want to get a rounded outlook at the market and its potential, there might not be a company that has a more holistic look, especially as it points to technology, than Microsoft. So everyone’s eyes were on Microsoft.

And of course, Google went the same day. And we’ll talk about them in a little bit. But the first and foremost set the tone of whether or not things are looking bright, the economy’s looking good. We had a Fed week. Were they going to cut rates? They didn’t. Came down to what did Microsoft do? And Microsoft did fantastic. Now again, beat, beat, but in range guidance. And for whatever reason, nowadays, apparently being in the range of what everybody expects isn’t good enough. So after beating on the bottom and beating on the top, showing really, really good results, talking about 53,000 Azure customers, 30% growth of Azure, which again, we’re going to talk all the different clouds today, the comparisons are becoming more and more difficult because of how the companies book cloud revenue. But 17.6% year-on-year growth, a $2.93 per share income. But yet people weren’t happy. They still sold the stock. Why is that? Frankly, it’s because, one, there was a melt up. As we headed into the earnings right now, all the technology names were up bigly. Bigly is a word by the way.

Patrick Moorhead: I’ve heard it a few times.

Daniel Newman: It was up bigly. I mean, and we’ll talk about AMD. They were up 20% a month. Microsoft had reached all time highs, 3 trillion market cap. So some things are like, why did everyone sell? Because everybody bought into the earnings. Over the last few quarters, if you haven’t noticed a trend, it was sell the news. It was buy the room, sell the news. So everybody knew that they were going to do well. But unless you do a beat, beat and some sort of mega raise, and you’ll see that when you look at Meta and Amazon, who surprised a little bit. Everything’s kind of a beat, beat and guide and then people sell, taking some profits off the table.

But let’s talk a little bit more about the business. I mean, look, one of the numbers that I was most excited about last quarter was when Amy Hood talked about the 2% of Azure revenue being impacted by the company’s generative AI technology and solutions. This quarter, I think they indicated something like 6%. So what we’re seeing is, in a very short order of time, the amount that AI is impacting cloud growth is going up in orders of magnitude. You’re talking about three times order of magnitude, quarter over quarter. When I joined CNBC and talked about it earlier this week, I was kind of previewing on this news that IBM came out with a similar number that they doubled their generative AI and 5Xed their proof of concepts.

So you see, there was a lot of strength right now in AI across the portfolio. You also saw some strength in their PC business, Pat. You saw strength in their business apps. When I say strength, I’m talking double-digit growth in these different categories. And another thing which, Pat, was kind of interesting. He didn’t give a number, but I like this one from Satya. He talked about, they saw an increase in billion dollar Azure commitments. I mean, think about that. Individual customers making billion commitments to spend with Azure. So overall, really, really strong quarter from Microsoft, Pat. It’s the bellwether of tech right now. They are the $3 trillion plus juggernaut of the industry. And it seems that they’re on a just absolute terror. And Satya’s leadership has been really, really strong. But it seems that they’re just so well positioned, so well diversified. The AI/PC movement sits with them, OpenAI, they’re just are getting it right, they’re getting it early. Others are catching up, but then every time others catch up, Microsoft seems to have another turbo-boost of acceleration in what it’s doing. And it was indicated in this quarter’s results.

Patrick Moorhead: Yeah, really good overview. It’s funny, you can beat on EPS by almost 6% and it becomes a yawner. And yeah, I’m not confused. I know it’s about the guide and everything, but I’m going to pull out some nuggets I thought were important. And it’s interesting, Dan, we talked about this in our 2023 wrap and our predictions for 2024 that AI was going from kind of this NVIDIA, building stuff, to actually enterprises using it. And the way that Satya talked about it was moving from talking about AI to applying AI. So I feel very much in alignment there. Some things that stood out for me, a third of the 53,000 Azure AI customers were brand new. And I think that was for the half. Half of Fortune 500 users are using Azure AI. They did come right out and say that they believed that they gained market share. And who they gained that on, we will see. We’re not the bean counters. I don’t know if it’s on AWS or Google, but it could be the smaller folks.

Couple discussions that went on. You look at the questions that came up, it was on two things, the 6% AI lift for Azure, how could that possibly be a bad thing? But they just couldn’t quite understand that. And I’m trying to wonder, and it’s always dangerous to think like Wall Street, but do they think that that demand could go away over time or that OpenAI magically does something different? Because in the Azure number is OpenAI, right? It’s basically an IaaS and a PaaS customer. So I think it’s positive. And the other thing, something about CapEx. CapEx was going up and they said it was a material increase to scale AI. To me, that’s a bad thing if you can’t at least be margin neutral or improve your margins.

Well, they came right out and said, “Our gross margins are improving with AI, gross margins, and OpInc AI leverage.” And if you look at those two things, I think that’s huge. So if you’re adding CapEx, but you can get OpInc leverage lift, and by the way, that’s code for productivity increases. What do most people at Microsoft do all day? Well, the engineers code, and we’ve seen what you can do with GitHub Copilot. In fact, GitHub Copilot, they have 1.3 million paid subscribers. That just blows me away. And you initially do a side eye on it because it’s so big. But my son at college, and he’s a data science major, he uses, and everybody uses GitHub Copilot to help with coding. So pretty darn exciting there.

We always talk about too, the best AI, you have to have the best data. And boom, CosmoDB transactions up 42%, Fabric Data up 46%. That is just amazing. So yeah, things are coming in line. I’m going to end on PC and Windows. Satya came out and said, “In 2024, AI will become a first class part of every PC.” And I think we’re going to see some serious action hitting in the middle. I did a panel at CES with Intel. And Pavin, who runs engineering across Surface and Windows, basically said, “We are re-architecting the operating system,” and I’m paraphrasing him, to deliver AI capabilities. I think it’s going to be exciting and I’m really glad that Microsoft brought it up.

Patrick Moorhead
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Patrick founded the firm based on his real-world world technology experiences with the understanding of what he wasn’t getting from analysts and consultants. Ten years later, Patrick is ranked #1 among technology industry analysts in terms of “power” (ARInsights)  in “press citations” (Apollo Research). Moorhead is a contributor at Forbes and frequently appears on CNBC. He is a broad-based analyst covering a wide variety of topics including the cloud, enterprise SaaS, collaboration, client computing, and semiconductors. He has 30 years of experience including 15 years of executive experience at high tech companies (NCR, AT&T, Compaq, now HP, and AMD) leading strategy, product management, product marketing, and corporate marketing, including three industry board appointments.