Microsoft & Google Earnings Reviews

Digesting the results of these two giants.

We strongly encourage you to share this article far and wide if you find it valuable and feel inspired to do so. That’s how we grow.

1. Microsoft (MSFT) -- FY Q4 2023 Earnings Review

a) Demand

• Beat revenue estimates by 1.3% & beat guidance by 1.5%.

  • All three revenue buckets beat consensus estimates.

• Azure revenue +26% Y/Y FX neutral (FXN) missed 26.7% growth estimates & missed 26.5% growth guidance.

• Met commercial bookings guidance of roughly flat Y/Y growth.

PC = Personal Computing

Demand Context:

• Revenue was up 10% Y/Y FXN.

• $224 billion in commercial remaining performance obligations rose 18.5% Y/Y.

• Ad spend was weak and below internal expectations.

• Office 365 commercial seats rose 11% Y/Y with consumer subscribers rising 12.2% Y/Y to 67 million.

• 13.9% 3-yr revenue CAGR vs. 14.8% Q/Q & 12.6% 2 quarters ago.

b) Profitability

• Beat EBIT estimates by 4.3% & beat guidance by 4.3%.

• Beat $2.55 GAAP EPS estimates by $0.14.

• Beat operating cash flow (OCF) estimates by 5.6%.

• Beat cloud gross margin estimates of +200 basis points (bps) Y/Y by 100 bps.

NI = Net Income

Margin Context:

• Earnings per Share (EPS) rose 21% Y/Y.

• Gross margin was helped by a change in accounting methodology last quarter. When stripping out this benefit, it still beat expectations and guidance by 100bps.

• Operating expenses (OpEx) rose 2% Y/Y but would have been flat without a payment to the Irish Data Protection Commission.

• Free cash flow rose 12% Y/Y and would have risen 19% Y/Y without a one time tax payment for capitalizing R&D provisions.

c) Outlook

• Missed revenue estimates by 1.1%.

• Met 25.5% Y/Y constant currency Azure growth estimates.

• Beat EBIT estimates by 1.6%.

For the full fiscal year 2024, it guided to margins being flat Y/Y which is slightly worse than the modest expansion expected. Furthermore, it enjoyed $3.7 billion in avoided depreciation by extending the useful like of its servers and equipment in FY 2023. This benefit will fall to $2.1 billion next year and will serve as a profit comp headwind. Finally, CapEx will rise throughout 2024 to support investments in AI infrastructure. Google said the same thing on its call. All of this is to say that input costs will rise, but it will manage OpEx to ensure EBIT and net income margins don’t contract.

d) Balance Sheet

• Returned $9.7 billion to shareholders vs. $9.7 billion Q/Q.

• $111.3 billion in cash & equivalents.

• $42 billion in long term debt.

• Headcount is flat Y/Y.

e) Call & Release Highlights

Cloud & Azure:

Azure continued to take more market share this quarter. The company is still dealing with the same workload optimization issue holding back the cloud industry. Still, that headwind did not worsen sequentially and Satya expects this obstacle to be worked through over the next couple of quarters. Analysts pressed leadership on any long term growth color it would give about Azure. They declined to provide that color.

• Azure Arc customers rose 150% Y/Y & 20% Q/Q to reach 18,000.

  • Arc is its multi-cloud management platform to let a customer access Azure services on-premise and on the edge.

• Azure AI added 100 new customers per day during the quarter including Mercedes and Flipkart.

• KPMG announced a multi-billion dollar commitment to transform its operations through Azure AI.

• Average contract value for Azure set a new record this quarter.

“We think Azure can have sustained high growth which is something we’re excited about.” -- CEO Satya Nadella

More on CoPilot (Microsoft’s AI powered virtual assistant to power code writing, email sending and productivity):

27,000 organizations use GitHub Copilot to automate source code processes within the DevSecOps (development-security-operations) world. That represents 100% Q/Q growth. Copilot has now been integrated into Power pages to make building low code sites seamless. Microsoft will continue to work on rolling out Copilot-augmented products like for its security suite this fall.

It spent the call talking about all of the opportunity for Copilot to drive better outcomes and monetization. For Windows 365 alone, a 10% up-take of its new Copilot subscription would drive 5% upside to 2023 revenue and likely higher profit upside. That’s just one monetization example and uses a pessimistic take rate. 365 Copilot is now live for 600 early release customers who call it a “game changer.”

Business Apps:

• Microsoft took market share across all products within this segment. Dynamics crossed $5 billion in annual revenue.

• Teams now has 600,000 subscribers for its premium tier just 5 months into the launch. 70% of the Fortune 100 uses Teams Rooms which is up 100% Y/Y.

• LinkedIn passed $15 billion in annual revenue and accelerated member growth for its 8th straight quarter. It has 950 million members vs. 930 million Q/Q.

Security:

• 1 million customers use its security products which is up 26% Y/Y.

• 60% of its customers use 4+ modules with these users growing 33% Y/Y.

f) Take

This was a solidly boring quarter for Microsoft. Profit is faring better than demand as it pulls back on costs amid a chaotic exogenous backdrop. With one of the deepest moats in the World (the enterprise bundle) and a superstar leadership team, it’s hard to bet against this name. I never would. Cloud growth will bottom, AI demand will accelerate and Microsoft will continue to thrive. Was this its best quarter? Not even close. Was it entirely fine. Yes.

2. Alphabet (GOOGL) -- Q2 2023 Earnings Review

“There’s exciting momentum across the business.” — CEO Sundar Pichai

a) Demand

• Beat revenue estimates by 2.5%.

• Beat cloud revenue estimates by 1.9%.

Demand Context:

• 24.9% 3-yr revenue CAGR vs. 19.2% CAGR Q/Q & 18.2% 2 quarters ago.

• Strength in core search and recovering YouTube ad demand powered the outperformance this quarter along with continued cloud momentum.

• Revenue growth was 9% Y/Y FXN.

b) Profitability

• Beat EBIT estimates by 9.4%.

• Beat FCF estimates by 56%.

• Beat $1.34 EPS estimates by $0.10.

Margin Context:

• Continues to combine teams and shift employees to higher priority areas while it greatly slows hiring.

• FCF was helped by deferring some tax payments to Q4.

• OpEx rose 4% Y/Y as it controls costs.

c) Balance Sheet

• Repurchased $29.5 billion year to date vs. $28.5 billion Y/Y.

• $118 billion in cash & equivalents.

• $77.7 billion in long term debt.

• Headcount rose about 4.4% Y/Y.

“We continue to invest while durably reengineering our cost base.” -- Outgoing CFO Ruth Porat

d) Outlook

Google did not provide any concrete guidance as per usual. It did tell us that ad spending continued to improve on Search and YouTube into this quarter. Like Microsoft, it expects CapEx to rise sequentially throughout 2023 to support ramping AI infrastructure investments.

It reiterated that expenses will grow more slowly than revenue in 2023. Hello operating leverage.

e) Call & Release Highlights

Search:

Google launched its search generative experience (SGE) tool this quarter to accompany Bard. This paves the way for more natural search and has been shown to enhance the quality of query results. Since launching in May, SGE has already cut query response time by 50%.

It will soon launch Gemini as its foundational large language model (LLM). It will be multimodal meaning it can effectively field text, images, code and more data types.

Advertising:

• YouTube is using Gemini and Performance Max (its AI-infused campaign creation tool) to ad new placement and ad format types.

• 80% of advertising now use at least 1 AI ad tool.

• Debuted a new Gen AI model for conversational campaign creation to simplify that process.

• Upgraded its insights dashboard for more open campaign reporting.

• Ace Hardware used Google’s new omni-channel ad bidding tool to have one of its best weeks of revenue ever. Hershey’s enjoys its best ROI out of any ad channel with YouTube. That ROI has improved 65% from 2018 to today.

• Debuted 30 second non-skippable ads on YouTube TV.

Google Cloud:

• 70% of generative AI unicorns are Google Cloud customers.

• Launched a new supercomputer with Nvidia’s H100 chips which helped Applovin double its compute performance. Its using Nvidia GPUs and its own Tensor Processing Units (TPUs) for it. TPUs are “custom, application specific circuits” per Bard.

• Generative AI cloud customers are up 15x Q/Q (small base).

• Google cited the same workload optimization headwinds that Microsoft Azure discussed and that I’m sure AWS will talk about too.

More on AI:

• Box and Salesforce are among Google’s Gen AI partners gearing up to train 150,000 employees on use cases.

YouTube:

• YouTube shorts has 2 billion MAUs vs. 1.5 billion Y/Y. YouTube is now in the process of adding Shorts inventory to Google’s overall advertising supply.

• YouTube reaches 150 million people through connected TV in the U.S.

• Partnered with Max to bundle its new NFL Sunday Ticket offering with the popular streaming service on YouTube TV.

Restructuring:

• Has incurred $2 billion in year to date restructuring charges from layoffs and another $564 million in real estate shrinkage charges. These charges are now largely behind it.

• Useful life extension of servers from 4 to 6 years and network equipment from 5 to 6 years has added a full $1.5 billion in year to date net income via less depreciation expense.

CFO Change:

CFO Ruth Porat will transition to the President and Chief Investment Officer at Alphabet. She will be CFO until 2024 with the company now actively looking for a replacement.

f) Take

This was a flawless quarter. It’s effectively controlling costs and hiring while finding sequential acceleration in its all-important search business. The FCF machine is also humming once more.

Google Cloud continues to be a nice new source of EBIT, Bard is a great product and YouTube demand should get a jolt from the NFL rights. The new SGE tool could quickly finish eliminating the narrative that Microsoft and OpenAI will be the death of Google. Nothing to pick at here.