MSFT earnings update 20240731

$Microsoft (MSFT)$

Cloud business

Azure +30% yoy, lower than the market expectation of 31-32% yoy. Next quarter guidance 28-29%, lower than the market expectation of +30% yoy

As for the reason, the company gave a side answer when giving guidance, "in H2, we expect Azure growth to accelerate as our capital investments create an increase in available AI capacity to serve more of the growing demand." It means that the growth rate may be limited due to insufficient supply in this quarter and the next two quarters.

But this may not be the whole story. Referring to the range of guidance given by the company in history, it will be slightly conservative and give room for beat. The company has a relatively high visibility of supply. In this case, the growth rate also fell at the lower end of the 30-31% guidance. Perhaps other cloud businesses are not strong enough, and the growth of some European regions mentioned by the company is lower than expected.

AI revenue

The AI-related revenue contribution in Azure accounts for 8%, which is consistent with expectations, and there is no surprise or joy. Github Copilot's annualized revenue is around US$300 million.

Office Copilot has made some progress, but it is still not obvious. Office commercial was +14% yoy in the fourth quarter, and the 1Q25 guidance was also +14% yoy. The downward trend of growth has changed to a certain extent. According to the company's performance meeting in these two quarters, there may be hundreds of thousands of subscribers (not necessarily accurate, welcome to discuss). Last quarter, 8 companies subscribed to more than 10k seats, and this quarter it became 16. If these companies account for 50% of the total subscriptions, the corresponding total subscriptions will be around 400,000-500,000. If the quarterly growth rate can continue to double, the contribution to the growth rate of office commercial next year may reach 1-2%. Capex: 4Q single-quarter cash capex is 13.9bn, slightly higher than the expected 13.3bn. Including finance leases, the caliber is 19bn, higher than the expected 15-16bn. Half of the Capex is used to build data centers, and the remaining half is used to purchase CPU/GPU. In 2024, the total capex is 55.7bn (including finance leasing), of which cash capex is 44.5bn. The market previously expected 70-75bn in 2025, but it seems that it will be adjusted upward to 80-90bn.

In general, the risk of MSFT has increased significantly after this performance. Simply put, the current contribution of AI is average, and the overall cloud business is also lower than expected. In the short term, it will boost upstream chip manufacturers, but the ROI pressure of AI-related investments will also begin to shift to MSFT. If AI cannot release performance as expected, overcapacity, and depreciation will begin to affect profit margins, the risk will increase significantly.