Company Overview: Microsoft Corporation is a technology company. The Company develops, licenses, and supports a range of software products, services and devices. The Company's segments include Productivity and Business Processes, Intelligent Cloud and More Personal Computing. The Company's products include operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games, and training and certification of computer system integrators and developers. It also designs, manufactures, and sells devices, including personal computers (PCs), tablets, gaming and entertainment consoles, phones, other intelligent devices, and related accessories, that integrate with its cloud-based offerings. It offers an array of services, including cloud-based solutions that provide customers with software, services, platforms, and content, and it provides solution support and consulting services.


MSFT Details

Microsoft Corporation (NASDAQ: MSFT) is known to be a tech giant that aims to continuously witness positive revenue growth and has demonstrated a track record of sales over the last one year. With bolt-on acquisitions and momentum from cloud platform, the sales number is expected to be on uptrend going forward. Microsoft has recently acquired a small artificial intelligence (AI) start-up company - Bonsai while details of the agreement are yet to be disclosed. This boosted the stock price by 1% on June 20, 2018. Thus, the drive towards AI is also picking up. MSFT is evolving its gaming segment to have more dependence on higher margin software and services business and the revenue of the segment is also increasing. Streaming product segment is another area catching attention in view of industry shift.The group’s return on equity has been much higher than the industry median (0.8%), and is improving continuously.

Acquired GitHub: Microsoft Corporation (NASDAQ: MSFT) snapped up the world’s leading software development platform, GitHub, for $7.5 billion. Primarily, the platform helps about 28 million developers to learn, share and collaborate for paving a better outlook. Through the move, developers will be able to attain more efficiency during development lifecycle, and have better enterprise use of GitHub with Microsoft’s developer tools and services. The acquisition that is expected to close by the end of the calendar year, is subject to customary closing conditions and regulatory review. Meanwhile, GitHub will still operate independently to cater to all developers across various industries for projects deploying code to any operating system, cloud or device. MSFT will report GitHub’s financials as part of the Intelligent Cloud segment under the businesses it runs. This acquisition is slated to be accretive to operating income in FY20 on a non-GAAP basis, and to have minimal dilution under 1 percent to earnings per share in FY19 and FY20 on a non-GAAP basis (which excludes expected impact of purchase accounting adjustments, integration and transaction-related expenses). MSFT will use a portion of the amount under share repurchase authorization for the above transaction. MSFT had asked Simpson Thacher & Bartlett LLP to be legal advisor while Morgan Stanley has been acting as exclusive financial advisor to GitHub with Fenwick & West LLP being the acting legal advisor. Given the boom in digital transformation, many companies drive business processes and functions with a plethora of choices that help developers determine value creation and growth; and in this scenario, GitHub that is home to modern developers, will benefit given the exposure provided for software innovation and open source projects.

Equinor and Microsoft in Cloud-Services Partnership Deal: Norway's Equinor ASA has entered a strategic partnership with MSFT for cloud services delivered from new Microsoft data centers in Norway. As part of the agreement, Equinor will provide industry knowledge and business needs to support Microsoft in developing new solutions for the energy industry, while Microsoft will provide expertise to accelerate Equinor's IT development and establish new data centers in Stavanger and Oslo. This is a strategic partnership under a seven-year consumption and development agreement in the hundreds of millions of dollars. Moreover, the company plans to use the agreement as a platform to identify new solutions for the energy industry and further capitalize on common business opportunities. Cloud services from MSFT’s new data center locations are expected to come into operation in late 2019.

Growing presence via acquisitions: Microsoft has been growing business via acquisitions and also working on nascent technology that would eliminate cashiers and checkout lines from stores, in a move to give competition to Amazon Go. They also acquired Flipgrid, which is a video sharing platform for students and educators. Microsoft would make Flipgrid free for schools compared to the previous subscription plans of $40/year for educators, $800/year for school districts, and $1,000/year for schools. Customers who already paid for a subscription will receive a prorated refund.

Third Quarter 2018 Performance: MSFT in the third quarter 2018 has reported 16% rise in revenue to $26.8 billion. The revenue in Productivity and Business Processes segment grew 17% to $9.0 billion (up 14% in constant currency). This is due to  Office commercial products and cloud services that posted revenue growth of 14% (up 12% in constant currency) driven by Office 365 commercial revenue growth of 42% (up 40% in constant currency). Office consumer products and cloud services revenue has posted growth of 12% (up 9% in constant currency) and Office 365 consumer subscribers increased to 30.6 million. LinkedIn revenue posted growth of 37% (up 33% in constant currency) with continued acceleration in engagement highlighted by LinkedIn sessions growth of over 30%. Dynamics products and cloud services revenue has posted the growth of 17% (up 14% in constant currency) driven by Dynamics 365 revenue growth of 65% (up 62% in constant currency).


3Q FY18 Performance (Source: Company Reports)

Improving performance of cloud segment: Further, in the third quarter 2018, the company has posted 17% growth (up 15% in constant currency) in the revenue of Intelligent Cloud segment to $7.9 billion. This is due to the fact that Server products and cloud services revenue posted growth of 20% (up 17% in constant currency) driven by Azure revenue growth of 93% (up 89% in constant currency). The group is a leading player in cloud security. Advanced AI reasons over hundreds of billions of signals each month to identify anomalies, automate detection and help customers respond to cyber threats. The group is offering a new value for customers, Microsoft Secure Score, Attack Simulator and Windows Defender ATP automatic detection and remediation capabilities, as well as a new open API for the Intelligent Security Graph.

Segment growth with better performance from LinkedIn: Enterprise Services revenue has posted growth of 8% (5% in constant currency). In addition, MSFT has reported 13% (up 11% in constant currency) growth in the revenue in More Personal Computing to $9.9 billion. The growth in this segment is due to Windows OEM’s revenue that increased 4% (up 4% in constant currency) driven by OEM Pro revenue growth of 11%. Windows commercial products and cloud services revenue soared up 21% (up 17% in constant currency) driven by an increased volume of multi-year agreements and the mix of products that carry higher in-quarter revenue recognition. Gaming revenue has posted growth of 18% (up 16% in constant currency) driven by Xbox software and services revenue growth of 24% (up 21% in constant currency) mainly from third party title strength. Surface revenue has posted growth of 32% (up 27% in constant currency) against a prior year comparable impacted by product end-of-life-cycle dynamics. Search advertising revenue excluding traffic acquisition costs increased 16% (up 14% in constant currency) driven by higher revenue per search and search volume. The group’s LinkedIn performance is better than expectations with revenue growth of 37% year-over-year. Better engagement is driving strong demand for sponsored content and marketing solutions and record levels of job postings and job visitors again this quarter in Talent Solutions.


Product and Service Revenue (Source: Company Reports)

Dividend: MSFT has declared a quarterly dividend of $0.42 per share. The dividend is payable on September 13, 2018, to shareholders of record on August 16, 2018. The ex-dividend date will be August 15, 2018.


Cash Returned to Shareholders in the past 5 years (Source: Company Reports)

Stock Recommendation: The stock of Microsoft has been in bullish momentum generating over 45.7% in the last one year (as of June 20, 2018) and we believe the bullish momentum will continue given their focus on cloud platform. MSFT has in fact returned about $6.3 billion to its shareholders as dividends and share repurchases, as at 3Q of fiscal year 2018. This has been an increase of 37% over previous corresponding period. We rate a “Buy” on the stock at the current price of $ 101.87, ahead of Microsoft Fiscal Year 2018 Fourth Quarter Earnings call scheduled for July 19, 2018.
 

MSFT Daily Chart (Source: Thomson Reuters)

 
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