An impressive year for Microsoft (MSFT 84.43, +5.67 +7.20%) stock gets even more impressive following last night’s Q1 report in which the company beat market expectations for earnings and revenues. With the stock trading at all-time highs today, management’s guidance and commentary look even more favorable even with the stock boasting gains of better than 34% year-to-date.
Put simply, MSFT had a solid quarter. Revenues were up again among all business segments and the company’s LinkedIn revenues beat its own outlook. Specifically, revenues for the period were up 11.7% to $24.5 billion and earnings of $0.84 per share were better than expected.
Breaking the revenue beat down a bit, Productivity and Business Processes sales were up 28% to $8.2 billion as Office commercial products and Dynamics compounded the strength in the LinkedIn segment with growth of 10% and 13%, respectively.
Intelligent Cloud revenues were up 14% to $6.9 billion in Q1. The company’s Server products were driven by Azure, which saw revenues growth of 90% (and 89% in constant currency). Enterprise Services revenues were up a modest 1% (0% in constant currency) as growth in Premier Support Services was offset by declines in customer support agreements.
Also, More Personal Computing saw revenues mostly flat to $9.4 billion as Windows OEM revenues were up 4%, ahead of the overall PC market. Windows commercial products and cloud services saw revenue increase 7% in the quarter driven by strength in annuity. Further, Search advertising revenue excluding traffic acquisition costs increased 15% mostly due to higher revenue per search and search volume. Surface revenue increased 12% (up 11% in constant currency) driven by sales of the new Surface Laptop and Gaming revenue increased 1% with Xbox software and services revenue growth of 21% (up 20% in constant currency) but partly offset by lower hardware revenue.
Turning now to guidance, MSFT gave its typical segment guidance on the conference call last night. Management gave expectations for Productivity and business processes revenues between $8.75-8.95 billion, Intelligent Cloud sales between $7.35-7.55 billion and Personal Computing revenues between $11.7-12.1 billion. By this guidance, Q2 revenues should be in a range of $27.8-28.6 billion.
Management also gave commentary about the Enterprise Services segment on the call; the company suggested Q2 revenue growth in this space would be similar to Q1. The company also expects revenues from Surface product lines to be up slightly from Q1 owing to the Surface Laptop and Surface Book 2 ramp.
Further, in Gaming MSFT sees higher mix of hardware revenues significantly impacting both segment and company gross margins. The company expects Gaming COGS between $11-11.2 billion, in a 'normal' range for a holiday qtr.
Looking a bit further ahead, MSFT gave expectations for full year operating expense growth, ex-LinkedIn, of 4-5% (unchanged). The company also commented that margins are trending a bit better on both gross and operating (expect operating margins, ex-LinkedIn, to be up year-over-year). Even more, the company now expects LinkedIn, ex-purchase accounting, to be accretive to EPS this fiscal year (prior guidance was for LinkedIn to be FY18 dilutive and FY19 accretive).
In all, MSFT turned in an impressive quarter. The stock currently trades about 23x this year’s earnings expectations compared to peers VMW (42x) and ADBE (54x). The session MSFT is putting together today is even more impressive when you consider shares were already up 25.4% YTD ahead of the report; today’s move takes the stock to +36.1% YTD compared to the +24.3% gains in the Nasdaq Composite and the 29.3% gains in the Technology ETF (XLK) during that same timeframe.