Earnings met expectations in 1Q23 but weaker 2Q23F guidance
- 1Q23 revenue of US$50.1bn (+11% y-o-y) led by slower cloud business growth but declining Personal computing segment, met street estimates.
- Operating income of US$21.5bn (+6% y-o-y) was 3% above consensus estimates led by cloud migration from on premise.
- MSFT guides 2Q23F revenue of US$52.35bn-US$53.35bn, where the mid-point guidance is 6% below consensus estimates
1Q23 revenue of US$50.1bn (+11% y-o-y), met consensus estimates. MSFT reported 1Q23 revenue of US$50.1bn (+11% y-o-y) in line with consensus estimates, but cloud revenue was lower than expected. MSFT’s Intelligent Cloud business segment, generated US$20.33bn in 1Q23 (+20% y-o-y) which was ~1.2% below street estimates. Azure revenue grew 35% y-o-y in 1Q23 compared to 40% y-o-y in 4Q22. The Productivity and Business Processes segment reported US$16.5bn (+9.5% y-o-y) driven by Office 365 and LinkedIn. Majority of the Microsoft 365 bookings came from E5, a higher-priced bundle. Revenue from personal computing (PC) segment continues to drop for the past three consecutive quarters, reported US$13.3bn (-0.3% y-o-y) in 1Q23. Sales of Windows license to device makers dropped 15% y-o-y in 1Q23. This was mainly due to the declining global PC shipments (-19.5% in quarter ended September-Gartner).
1Q23 operating income of US$21.5bn (+6% y-o-y) was 3% above consensus estimates. MSFT reported 1Q23 operating income of US$21.5bn (+6% y-o-y) which is 3% above consensus estimates. However operating margins dropped to 42.9% in 1Q23 compared to 44.7% in 1Q22. Operating income for cloud business recorded US$9.0bn (+17%y-o-y) with an operating margin of 44% in 1Q23 while PC segment recorded US$4.2bn (-15% y-o-y) with 32% margin. So, MSFT is likely to see an uplift in its margins when customers switch from its on-premises install bases (e.g: Windows and Gaming) to its cloud platform, but higher energy cost are hurting the margins of Azure. Furthermore, MSFT reported 1Q23 normalized net income of US$17.6bn (-14% y-o-y), in line with consensus estimates. During 1Q22 MSFT had a US$3.3bn tax benefit, therefore the normalized net income growth y-o-y is 2%.
2Q23F revenue guidance is 6% lower than consensus implies a mere 2% growth y-o-y. MSFT sees US$52.35bn-US$53.35bn in revenue for 2Q23F, which implies merely a 2% y-o-y growth at the middle of the range, which is also ~6% lower than consensus estimates of US$56bn. MSFT’s implied operating margin for 2Q23F would be around 40%, narrower than consensus’ 42%. Management indicated that Azure growth might fall sequentially by about 5% in constant currency, to about 37% while windows revenue from device makers to decline in the high 30’s as a result of weaker demand seen in PCs.
BUY MSFT with a target price of US$276, based on 12m-forward P/E of 28x
