Software 1Q24 Update – ERP in recovery mode July 4, 2024 72

  • 1Q24 software sector revenue growth decelerated modestly to 13% YoY (4Q23: 14% YoY). Microsoft’s 17% YoY revenue growth, contributing 5% points to the sector’s overall growth, helped to offset lingering weakness in the CRM segment due to macroeconomic headwinds and shifting priorities towards AI investments. 
  • ERP companies continue to offset sluggish growth in on-premise software sales by expanding cloud-based solutions, with Oracle and SAP reporting 20% YoY and 24% YoY cloud revenue growth, respectively. CrowdStrike’s 33% YoY revenue growth was fueled by strong demand for its unified cybersecurity platform amid increasing online threats and AI-based cyber attacks. 
  • Forward guidance is for 2Q24e revenue growth of 12% YoY. We expect growth to be supported by increased cloud-related spending on infrastructure and applications that improve cybersecurity, provide a holistic view of business operations, and enhance customer experience. Most software firms launched generative AI tools for data analysis and automation, but none of those services seem to have a material impact on the top line in FY24e as companies prioritise enhancing customer engagement over monetisation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary
Productivity: Microsoft and Adobe both met our estimates for sales and earnings. Microsoft reported revenue growth of 17% YoY to US$61.9bn, with Azure growing 31% YoY, fueled by robust demand for its cloud infrastructure and AI solutions. Office 365 Commercial revenue grew by 15% YoY driven by paid user growth (up 8% YoY to ~400mn) and higher revenue per user due to E5 upsell at renewals. The Gaming segment’s revenue surged 51% YoY to US$5.5bn driven by strong player engagement in Activision titles, while Windows OEM benefited from recovery in the PC market. Microsoft expects Azure’s growth to remain steady at 31% YoY in 2Q24e, indicating sustainable demand trends. In 1Q24, Microsoft’s CAPEX increased by 66% YoY to US$11bn due to investments in cloud and AI infrastructure development, and it is expected to remain at an elevated level over the next year. However, Microsoft continues to demonstrate higher operating leverage to minimize the impact on its margins. Meanwhile, Adobe reported revenue growth of 10% YoY to US$5.3bn in 1Q24, driven by higher subscription sales for its applications. Creative Cloud revenue rose 10% YoY
to US$3.1bn due to continued demand for its photography and video editing applications like Photoshop and Premiere Pro. Document Cloud revenue surged 19% YoY to US$782mn fueled by robust demand for Acrobat PDF and e-signature solutions. For 2Q24e, Adobe
expects its revenue to grow by 10% YoY to US$5.4bn, driven by subscriber growth and early traction around new product innovations such as Firefly Services and Acrobat AI assistant. Zoom’s revenue growth has slowed down due to increased competition from other video conferencing platforms and a post-pandemic shift as more people return to in-person meetings. For 2Q24e, Zoom expects its revenue to grow by 1% YoY to US$1.1bn, signaling a continued deceleration in growth. 

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