Why Microsoft Is a Buy

Microsoft (MSFT) announced third quarter ended April 30, 2016 total non-GAAP revenue of $22.1 billion, up 2 percent year-over-year from $21.7 billion during the same period last year.

Microsoft declared third quarter of 2016 adjusted net income of $4.97 billion or $0.62 per share, down 3 percent year-over-year from $5.10 billion or $0.62 per share in third quarter of 2015.

The key software technology company reported continued year-over-year top line growth primarily driven by the solid customer traction for its innovative set of recently launched key software and cloud-based products.

The revenue from cloud services and office commercial offerings increased 7% on constant currency basis primarily allowed by 63% constant currency revenue growth for office 365.
The revenue for key cloud services and Office consumer product offerings improved 6% on constant currency basis with significant growth in consumer subscribers for office 365 to about 22.2 million. Revenue from cloud services and advanced dynamics products enhanced 9% on constant currency basis with more than double the year-over-year growth of Dynamics CRM Online seat additions.

Net revenue for productivity and business processes segment of Microsoft expanded 1% (grew 6% on constant currency) with ongoing solid performance of Dynamics CRM Online and Office 365 somewhat offset by unfavorable foreign currency translations. Total gross margin in percentage declined year-over-year coupled with gross margin in dollars falling 4% (increasing 1% on constant currency basis) mainly due to enhanced cloud services mix. Operating income fell 7% while operating expenses fell 1% with key gains from foreign currency and superior marketing efficiencies somewhat offset the company investments to enable cloud innovation.

The significant growth in customer base for each of the key productivity and business processes segments including, Office Commercial, Dynamics and Office Consumer is believed to drive sustainable long-term company growth while delivering attractive shareholder returns.

A closer look at the segments     

Total revenue from cloud services, server products and Enterprise Services offerings improved 3% (grew 8% on constant currency basis) being somewhat offset by weaker foreign currency translations. The key gross margins in percentage declined year-over-year due to improved cloud services mix somewhat offsetting the key margin expansions in Enterprise Services and Azure. Gross margin in dollars fell 2% (grew 3% on constant currency basis). The operational expenditures from key investments for driving superior cloud innovation and enhanced sales capacity increased 13% and somewhat offset by attractive foreign currency benefits. Operating income fell 14% year-over-year to $2.19 billion in third quarter of 2016 from $2.53 billion during the same period last year.

The cloud services and server products revenue expanded 5% on constant currency basis over last year with significant annuity revenue expansion in double digits somewhat offset by key declines in transactional revenue. The revenue for server products remained constant over last year while Azure revenue expanded 120% at constant currency. Revenue for premium services of Azure increased in triple digits and for 7th successive quarter. SQL database and compute usage services of Azure grew in double digits year-over-year. The customers for Enterprise Mobility became twice on year-over-year basis to more than 27,000 while the key installed base expanded approximately 4x on year-over-year basis. The revenue contribution from Enterprise Services segment grew 15% on constant currency basis and primarily allowed by expansion of Premier Support Services.

The consistent and planned investments in the growth of intelligent cloud services business segment of Microsoft is expected to drive significant customer traction for the company’s cloud storage solutions given, consistently rising need for data storage space from all the key global enterprises, driving notable growth for Microsoft while delivering attractive shareholder returns.

Growing in the right areas     

Microsoft’s Personal Computing growth segment reported 1% revenue expansion or 3% growth on constant currency basis mainly due to Surface and search growth somewhat offset by weaker Windows and phone revenue coupled with unfavorable foreign currency translations. Gross margin in percentage grew year-over-year due to margin expansions in gaming and Surface while gross margin in dollars increased 2% or grew 6% on constant currency basis driven by Surface and search growth segments. Operating income expanded 57% while operating expenditures fell 14% due to foreign currency gains, favorable changes in display sales accountability and weaker phone spending.

Microsoft has recently declared to streamline the smartphone hardware business which is expected to develop an impairment charge for the company during the fourth quarter of 2016 while notably downsizing the workforce to minimize operational expenditures and deliver sustainable long-term profitability through continued innovation.

The continuing growth efforts of Microsoft by uniquely diversifying its business verticals while optimizing its operating structure is believed to put significant expense burden on the company’s financial position but position it strongly for delivering sustainable long-term growth while offering consistently impressive shareholder returns in form of dividends and strategic share repurchases.

Conclusion

Overall, the investors are advised to “Buy” equity in Microsoft Corporation considering the company’s significant long-term growth prospects with healthy PEG ratio of 2.28 and better than the industry’s growth average of 1.65 only. Microsoft also has a solid financial position to support this growth with notable total cash of $105.34 billion and smaller total debt position of $46.77 billion only, encouraging the company to make future growth investments. The profit margin of 12.06% seems impressive.
Published on Jun 17, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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