Microsoft heads lower after wrapping up FY24; Azure solid but not blowout seen in MarQ (MSFT)
Microsoft (MSFT -1.3%) is trading modestly lower after reporting Q4 (Jun) results last night. The software giant broke its string of five consecutive double-digit EPS beats with a very modest EPS beat this time. Also, revenue rose 15.2% yr/yr to $64.73 bln, which was slightly above analyst expectations. The Q1 (Sep) revenue guidance was a bit light of expectations.
- Let's start with Azure, which performed well but was not the blowout result we saw in Q3 (Mar). Azure grew +30% CC (constant currency), which was at the low end of prior guidance of +30-31% CC due to some softness in a few European geographies on non-AI consumption. That followed Q3's huge upside at +31% CC vs +28% CC prior guidance. So the number was decent, just not what we saw in Q3. The Q1 (Sep) guidance was a bit of a letdown but not bad at +28-29% CC.
- What was impressive is that Microsoft said it now has over 60,000 Azure AI customers, up nearly 60% yr/yr and average spend per customer continues to grow. Also, commercial bookings were significantly ahead of expectations, +19% CC. This record commitment quarter was driven by growth in the number of $10+ mln and $100+ mln contracts for both Azure and Microsoft 365. Commercial RPO increased +20% and +21% CC to $269 bln.
- On the consumer side, the PC market was as expected with Windows OEM revenue increasing 4% yr/yr. LinkedIn was a standout with accelerated member growth and record engagement. LinkedIn Premium sign-ups increased 51% yr/yr. Also, Search, Advertising, and News revs ex-TAC rose a healthy 19% as Microsoft again took share across Bing and Edge. MSFT continues to apply generative AI to how people search and browse. MSFT now has 500+ mln monthly gaming active users across platforms and devices.
- By segment, revenue from Productivity and Business Processes was $20.3 bln, +12% CC, slightly ahead of expectations, driven by better-than-expected results across all business units. Intelligent Cloud segment revenue was $28.5 bln, increasing +20% CC, in line with expectations. More Personal Computing revenue was $15.9 bln, increasing +15% CC, which was above expectations, driven by Windows Commercial and Search.
- Looking ahead to FY25, we know MSFT does not guide beyond the next quarter. However, it did say it continues to expect FY25 double-digit revenue and operating income growth. On the cost side, MSFT plans to increase cap-ex spend in FY25 relative to FY24 to meet the growing demand for its AI and cloud products. MSFT plans to scale its infrastructure investments, including building/leasing data centers and buying servers to serve customers. This could impact margins in FY25.
Overall, this quarter was not as impressive as Q3, but still pretty good with all segments showing upside or being in-line. We would not be overly concerned about Azure. A lack of demand is not the problem, it sounds like it's more due to capacity constraints, particularly on AI at Azure. That was the case in Q4 and MSFT expects that to continue into 1HFY25. However, Azure will benefit in 2HFY25 as its step up in cap-ex spend comes online. Also, the stock has been pulling back in recent weeks, so maybe an imperfect quarter was priced in already.
Advanced Micro soars on accelerating growth in Q2 supported by robust AI demand (AMD)
Advanced Micro (AMD +5%) leaps today after edging past analyst earnings estimates in Q2 on a decent-sized revenue beat and in-line Q3 guidance. The CPU and GPU designer was amid a roughly 25% sell-off over the past few weeks, getting swept up by a broader market correction that took a particular toll on tech stocks. However, AMD's Q2 results underscored accelerating demand for AI, more than enough to reinvigorate the stock and help push its competitors, including NVIDIA (NVDA), Intel (INTC), and Arm Holdings plc (ARM), nicely higher today.
- AMD posted adjusted EPS of $0.69 in Q2 on revenue growth of 8.9% yr/yr to $5.84 bln, returning to delivering solid top-line upside following last quarter's in-line performance.
- AMD's Data Center segment delivered exceptional revenue growth in Q2, climbing by 115% yr/yr and 21% sequentially to $2.8 bln. The company's flagship GPU, the MI300, exceeded $1.0 bln in revs for the first time, aided by expanded use from Microsoft (MSFT). The MI300 has been enjoying such strong demand that AMD lifted its FY24 Data Center GPU revenue forecast to $4.5 bln from $4.0 bln. After this year, MI300's successor, the MI325X, is expected to ramp, possibly helping maintain Data Center's upward momentum.
- AMD's Client segment also delivered healthy growth, registering a 49% bump in revs yr/yr and 9% sequentially to $1.5 bln, bolstered by healthy PC demand. With AI PCs launching just this past month, AMD does not anticipate the category to significantly impact revs until more products are added that serve multiple price points, possibly during 2025. Still, AMD is heading into the seasonally strong PC months as back-to-school ramps.
- Gaming and Embedded segments were the usual laggards in Q2, declining by 59% and 41% yr/yr, respectively. In Gaming, semi-custom demand remained soft as gaming consoles entered their fifth year. AMD anticipates sales to be lower in 2H24 relative to 1H24. In Embedded, AMD reiterated that Q1 marked a bottom, noticing signs of order patterns improving during Q2, leading to a gradual recovery during 2H24.
- With Data Center and Client leading the charge, AMD anticipates another quarter of accelerating growth in Q3. The company projected revs of $6.4-7.0 bln, a 15% improvement yr/yr and sequentially at the midpoint.
AMD's Q2 results were noticeably better than last quarter, enough to reenergize its stock today. The company's lifted FY24 Data Center GPU revenue target also bodes well for NVDA, which reports JulQ numbers late next month. There is still an issue over AI monetization. Given the capital being poured into AI, customers must eventually see a healthy ROI. For this to unfold, end-consumer prices will likely need to rise but stay below the current cost of performing a certain task without AI.
Still, as AMD remarked during its Q2 call, the overall view on AI is that investing is a must; the potential is too massive to sit on the sidelines. Thus far, demand for AI has not shown any signs of slowing down. Unless this begins, AMD remains poised to rebound from its recent correction. |
