High-technology and cloud-services giant Microsoft Corporation (MSFT – Free Microsoft Stock Report) reported revenue and earnings of $33.1 billion and $1.38 a share for its fiscal first quarter. (Years end June 30th.) This was another in a series of strong financial and operational performances for the company based in Redmond, WA, with the top and bottom lines comparing favorably with our estimates of $32.0 billion and $1.22 a share. As has been the case for the last year or so, the secular move to the cloud and cloud computing architecture taking place in the software industry and Microsoft's success in meeting its customer’s needs as they embrace the changes underscored the latest results. Investors were generally pleased with the report, with MSFT shares having risen modestly in early trading.
The upward trend in the company's commercial business continued to hold forth, reflecting a 30% growth in bookings in the September period. Meanwhile, commercial cloud revenue advanced 35.6% in the first quarter, reaching $11.6 billion, while the gross margin on this business came in at 66%, up four percentage points year over year, driven by a material improvement in Azure gross margin. Speaking of Azure, revenue from the platform grew 59% in the September period. Although the advance was slightly below Wall Street's target of 60%, this is still a very good showing, in our view. Indeed, Azure and services sold in conjunction with the platform are finding strong interest from Microsoft's customers, and our sense is the company will continue to have success making headway in the cloud arena. That is not to say Microsoft does not face stiff competition in the cloud business, but its cloud offerings span the gamut of corporate customers' needs, and the company continuously improves its market position, giving it the ability to effectively attract large customers.
Elsewhere, Microsoft's three operating segments-Productivity and Business Processes, Intelligent Cloud, and More Personal Computing-each reported good relative progress in terms of revenue and operating profit, with margin expansion across the board. Office 365, both commercial and consumer, was once again an important factor in the performance of the Productivity and Business Processes group, while Azure continued to be a force in Intelligent Cloud. Finally, Windows 10 performed nicely on the commercial side in the September period, with commercial products and cloud services advancing 26%, which, in turn, supported revenue growth of 3.4% in More Personal Computing, a more mature part of Microsoft's business.
What about Microsoft stock? The company appears comfortable with a forecast of double-digit revenue growth (say 10%-12%) for fiscal 2020, with the potential for a slight expansion in its operating margin (about 34% inclusive of depreciation in fiscal 2019). Taken together, earnings should advance in the 11%-13% vicinity this year, which is impressive for a company the size and scale of Microsoft. That said, and despite our view that the company should continue make headway in the cloud over the longer term, MSFT shares' current valuation cannot be said to be a bargain. Accordingly, those considering making a new commitment to this high-quality stock will need to be willing to shoulder a premium.
About The Company: Microsoft Corp. is the largest independent maker of software. It develops and sells products for a wide range of computing devices. The company also sells the Xbox video game console and offers cloud services.
– Charles Clark
