Results at a glance
Source: Company, PSR. *Note – Azure revenue amount is not disclosed.
The Positives
+ All segments beat revenue estimates. In Productivity and Business Processes, commercial Office 365 and LinkedIn performed better-than-expected. Paid Office 365 Commercial users grew 16% to 345mn, exceeding our FY22e end target of 341mn, due to demand from small and medium business and frontline worker offerings. More Personal Computing benefited from continued strength for Microsoft 365 and commercial PCs, as well as a surge in search advertising on LinkedIn, up 33%, from a sharp demand uptick that started three quarters ago as the economy reopened amid a tight labour market. In Intelligent Cloud, Azure grew 49% YoY vs estimates of 47%, with continued consumption of cloud services.
+ Another quarter of margin beats. 3Q22 operating margins from Productivity and Business Processes, Intelligent Cloud and More Personal Computing were 46%, 44% and 34%, all higher than estimates of 44%, 40% and 33% respectively. ARPU was higher from continued momentum for Microsoft’s higher-end E5 licenses. Azure cloud services margins continued to improve. The faster growing higher margin LinkedIn services that reached a record high of 13% of total revenue this quarter also helped to boost margins.
The Negatives
– Revenue impact from stronger USD. FX decreased revenue growth by 3%, 1% more than expected. The stronger USD is guided to decrease revenue by 2% in 4Q22 while decreasing COGS and operating expenses by 1%, a net negative to operating margins.
Outlook
4Q22 was guided to be another strong quarter. Reopening of the economy will drive Office Commercial user growth from small and medium sized businesses, while cybersecurity needs will drive ARPU growth through upgrades to premium E5 licenses. Azure will continue to benefit from businesses’ shift to the cloud. MSFT stated that large (>US$100mn) long-term contracts for Azure saw better-than-expected growth even against a very strong prior-year comparable. Customers are not looking at cutting IT budgets despite slowing economic growth.
Maintain BUY and unchanged TP of US$410.00
Our valuation remains unchanged based on DCF with a WACC of 6.2% and terminal growth of 4.0%. Our FY22e PATMI is raised by 3.5% on stronger revenue guidance and a lower tax rate. Microsoft is at the forefront of digitalisation, benefiting from secular growth in cloud computing, cybersecurity and artificial intelligence. Microsoft’s productivity software is also crucial and the most economically viable solution amid the tight US labour market.
