Quick thoughts on Microsoft Earnings

Overall this was a strong quarter. Topline growth looks strong, but the way Microsoft is getting there is getting more expensive each quarter. Capex and costs are rising fast and hurting the overall FCF. A similar story as Google’s. Microsoft is still FCF positive though.

First, revenue growth was strong at 18% YoY, totaling at just over $90B.

Azure the primary growth driver here and still accelerating. Azure and other cloud services revenue jumped 43%. Cloud is really driving growth in this segment, attributing $59.3B this quarter. Demand is there and it’s showing.

Just a little fun fact: nobody could have imagined, and I doubt anyone uses it, but CoPilot crossed 30M paid seats. Cool.

GAAP EPS is a bit inflated, due to a $3.2B one-time gain from their Anthropic investment and OpenAI investments. Strip it out and you lose about $0.30 in EPS.

CAPEX is blowing up. Capex spend was $41B this quarter, which is a 70% increase YoY. Nothing new here, but it really hurts the FCF. Also seems that a lot this Qs capex is short-lived assets. So expect fast depreciation and margin pressure. Cash capex picture below.

The $5.2B gap is equipment acquired via finance lease rather than paid cash upfront, which shows up as lease liabilities rather than in the headline capex line most people quote

Cash paid for property and equipment also skyrocketed by 110% to $35.8B, this is likely driven by acquiring CPUs and GPUs at higher prices.

This of course hurts their FCF, which dropped 23% YoY to just under $20B. Last year this was $25.6B. It's an Improvement compared to last Q though. Net income up, but ye, that AI buildout is hurting

Gross margins keep falling. They were 69% last year and now sit just above 67% . This seems mostly driven by the drop in gross margins in the cloud segment. Management attributes this to the sales mix shifting to Azure and continued investments in AI infrastructure. Scaling AI is expensive, and it is compressing profitability on a percentage basis.

Let's for now ignore the ''More Personal computing'' segment because that really isn't doing anything.

It also seems that OpenAI's commitments to use Azure are heavily inflating Microsoft's future revenue backlog. When you include OpenAI, Microsoft's total commercial bookings only grew by 10%.

But, if you remove OpenAI from the equation and purely look at Microsoft's "regular" business customers, their bookings actually grew by 18%.

All in all, the quarter looks decent. Azure is driving the show. Capex is hurting near-term FCF as expected. So good top-line results, but it's getting more and more expensive to get there.

Alright, thats just a quick first look.

What did you guys think? Anything I missed?

Cheers,

TacticzHazel