News of the Week (July 26-30)

9 min read

1. Microsoft Earnings Summary

“Over a year into the pandemic, digital adoption curves aren’t slowing down. They’re accelerating and it’s just the beginning” — CEO Satya Nadella

a. Demand

Microsoft generated $46.15 billion in total revenue. This represents 16.8% year over year (YoY) constant currency growth and beat mean analyst estimates by 4.6%.

Commercial bookings grew by 25% (constant currency) via strong Azure demand. Commercial cloud specifically surpassed $69 billion in annual revenue up 34% YoY.

3 business units (Azure, gaming and security) have all surpassed a $10 billion run rate within the last 3 years. LinkedIn also reached the same $10 billion milestone this year.

LinkedIn quarterly advertising revenue passed $1 billion for the first time thanks to 97% growth — triple the rate of its category.

The security business saw a 70% increase in small and medium business (SMB) customers with security revenues up 40% YoY.

Productivity and Business Processes guidance was for $13.8 billion to $14.05 billion. The $14.7 billion Microsoft posted translates into a 5.5% midpoint beat.

Intelligent Cloud guidance was for $16.2 billion to $16.45 billion. The $17.4 billion Microsoft posted translates into a 10% midpoint beat.

Personal Computing guidance was for $13.6 billion to $14 billion. The $14.1 billion Microsoft posted translates in a 2.1% midpoint beat.

The new Xbox has already surpassed the total sales of any previous Xbox model. Both the X and S series remain supply constrained.

Note that Xbox YoY comps were tough and LinkedIn YoY comps were easy due to the pandemic.

b. Profitability

Microsoft earned $2.17 per share. This represents 42% YoY constant currency growth and beat mean analyst estimates by 14.2%.

c. Next quarter guidance

Guidance notes:

  1. Expects LinkedIn growth in the high 30% range
  2. Expects Xbox growth in the low single digit range
  3. Expects Azure growth to be right around this quarter’s rate

d. Management commentary

CEO Satya Nadella on customer wins
  1. AT&T chose Azure to power its 5G core network. This was the first tier 1 telecom operator to move its customer traffic to the cloud.
  2. L’Oréal, Morgan Stanley, Mondelez, Campbell’s ServiceNow and SAP moved to Azure during the period.
  3. Won contracts with Epic Games and Volkswagen to deploy its GitHub security product. GitHub is used by 72% of the Fortune 50 to build, send and secure code.
Additional Satya Nadella highlights
  1. Teams now has 250 million monthly active users (MAUs). 124 organizations have more than 100K Teams users with 3K having over 1K users.
  2. Windows 11 will be available on new PCs this holiday season. This brings the operating system (OS) to the cloud much like apps have moved to the cloud enabling enterprises to stream the OS from anywhere and on any device.
CFO Amy Hood highlights
  1. Hood assured investors that there is more operating leverage left in the business model as Microsoft continues to pivot spend to its highest growth, most differentiated product categories.
  2. Microsoft returned $10.4 billion to shareholders via dividends and buy-backs which grew 16% year over year.

“I feel very good about margin improvement next year. The gross margin trends are very healthy looking forward.” — Hood

e. My take

Another great quarter from Satya Nadella and his team.

2. Facebook Earnings Summary

a. Demand

Facebook was expected to generate $27.8 billion in quarterly revenue. It posted roughly $29 billion in sales thus beating expectations by 4.3%.

The 55.9% growth metric includes a $982 million boost from a foreign exchange tailwind (weak dollar). Without the boost, Facebook beat revenue estimates by 0.7%.

For the Facebook app specifically, daily and monthly user growth came predominately from the Asia-Pacific and Rest of World regions. In North America and Europe, sequential user growth was either flat or down slightly with YoY growth in the low single digits.

For comparison, Pinterest posted -5% YoY domestic MAU growth for the same period and at much smaller scale.

While domestic user growth may be alarming to you, here are a few things to consider:

  1. We’re comping vs. YoY lockdown pain which dramatically helped Facebook’s user growth
  2. Nearly 80% of Americans already use the Facebook app monthly.
  3. Average revenue per user (ARPU) growth remains elevated as Facebook builds out its commerce and ad solutions.
  4. Growth will come from commerce, the rest of its apps and Oculus. The Facebook App is the stable cash cow at this point.
  5. It grew revenue by 49% in North America during the quarter.

b. Profitability

Facebook was expected by analysts to earn $3.02 per share. It earned $3.61 thus beating expectations by 19.5%. Net income grew by 101% YoY.

c. Management commentary