How can I better understand Microsoft's financial results? The highlight of the future is Co-Pilots!

Since entering 2024, Microsoft's stock price has continued its upward trend since 2023. After Apple, the company became the second largest company in the world with a total market capitalization exceeding 3 trillion dollars. After the market closes on January 30, Microsoft is expected to release its latest financial results report. The stock price will be evaluated by the market when the report is announced. Whether or not the market value can be maintained at $3 trillion will probably depend on the content of this new earnings report.

So how should we read Microsoft's earnings report? What indicators are likely to have a significant impact on stock prices? Actually,The answer is hidden in the development path Microsoft has followed over the past few years.

Generally,There are two options for businesses to grow. Do you want to increase sales (revenue) or improve profit marginsThat's it. It can be said that Microsoft is a company that has achieved both.

Over the past 5 financial years, the transformation from a PC manufacturer to a cloud provider has been a resounding success. Currently, the software business, which includes popular services such as Office 365, has adopted a business model that accumulates stock income on a subscription basis rather than selling software licenses as before.

Over the 2018-2022 fiscal year, sales almost doubled and net profit more than doubled. As you can see from the graph what this remarkable performance means,The growth rate of net profit exceeded the growth rate of salesThat's it. It shows that Microsoft's profitability was extremely high in that phase. As a result, the company's stock price has risen approximately 3.2 times since the end of fiscal year 2018.

Now let's take into account the financial results for the fiscal year 2023. In the 2023 fiscal year, the growth rate of sales (operating income) compared to the previous year was approximately 6%, and net profit growth was negative. What do you think when you see this result, which seems to have clearly entered a different phase from the past few years?

Stable sales and profit growth played an important role in Microsoft's leap forward.

Therefore, when analyzing financial results, it can be said that it is important to pay attention to sales and profit trends and continuously determine performance.

Currently, Microsoft generates revenue from the following three main business segments:

OS device businesshas continued to raise stable sales, but recently that growth has slowed, and it has also turned negative in the past 3 quarters. Expectations for PC-related divisions were originally not high since the days of relying solely on PCs are a thing of the past. However, in the first quarter of 2024, this business sector is expected to achieve 2.5% year-on-year growth, stabilize, and hit bottom. This may be a small surprise for the stock market. In the new financial results report to be released soon, attention continues to be paid to whether the individual business sector's earnings can maintain the trend of rebounding from the bottom price.

Cloud businessInstead of the OS device business, it emerged as the company's biggest revenue pillar, and currently Microsoft's cloud is second only to Amazon in terms of market share. The cloud business maintained sales growth of 20% or more, and continued to grow from fiscal 2019 to 2022.

However, in fiscal year 2023, the sales growth rate of the intelligent cloud business began to decline every quarter, and the year-on-year growth rate dropped to 15%. The good news is that Microsoft has found a breakthrough in the AI field, which has contributed to raising the level of the cloud business. In the financial results report for the first quarter of fiscal year 2024, the sales growth rate of Microsoft's intelligent cloud business began to rebound with the support of AI, and an increase of approximately 19% was seen compared to the previous year. The strong performance of the intelligent cloud business may be an important reason for the short-term rise in Microsoft stock prices after the announcement of financial results reports.

We should continue to pay attention to whether the rebound trend in the growth rate of the cloud business, including Microsoft's intelligent, will continue in the coming quarters.

What remains is the software business. Subscription revenue from Office 365 makes up the majority of this segment. As described above, the sales structure for Office software services was successfully transformed about 10 years ago, and we have moved from a sell-out license sales model to a subscription-based business model.

Subscription-based sales growth will depend on a growing customer base and higher service prices. Until now, Microsoft has been reluctant to raise prices, so sales growth has been mainly driven by the expansion of its customer base. It is a strategy to increase the number of customers rather than increase the unit price.

Microsoft's Office suite is characterized by high customer retention rates and exclusive features, and has unique strengths. Therefore, it is possible to anticipate that existing customers will renew their subscriptions.

As a matter of fact, sales growth in the software business has been very stable, hovering around 15% over several fiscal years. The year-on-year growth rate for Q4 2023 also landed at around 15%.

However, in the first two quarters of fiscal 2023, as companies tried to cut costs and reduce IT spending, Microsoft's commercial business revenue also fell to 7%. Fortunately, Microsoft then integrated AI-enhanced CoPilot subscription products into the office and launched them. According to what Microsoft management said in a conference call, the number of paid users exceeded 1 million by the first quarter of fiscal year 24. Revenue from commercial users has grown significantly in this business area, partly due to the high average revenue per user (ARPU).

The revenue growth rate of Microsoft's commercial business began to rise again in the third quarter of fiscal year 23, and the revenue growth rate returned to the level of approximately 13% in the first quarter of fiscal year 24.

With the new financial results report to be released soon, attention will continue to be drawn to Microsoft's commercial business division's Copilot subscription status and the resulting commercial business growth forecast for the near future. Microsoft's commercial business will be larger than its cloud business, which includes intelligent, and is likely to receive the most attention of all of the company's business units. This may be an important factor affecting Microsoft's stock price.

Net profit is usually the final indicator of profitability. However, Microsoft has individual business segments in each financial reportReport operating margins onlyI'm doing it.

From fiscal 2018 to 2022, according to Microsoft data, it can be seen that operating profit margins have improved consistently across all business segments.

Among these divisions, the software business has the highest profit margin, and its growth has been stable.

However, in fiscal 2022, the performance of OS devices began to decline to some extent. This was affected by cyclical fluctuations in the PC industry, and market expectations were not high originally. However, in the first quarter of 2024, profit margins will improve significantly compared to the same period last year, and there is a possibility that they will exceed market expectations.

What is noteworthy here is that cloud profit margins, including intelligent ones, declined slightly in fiscal 2022, and the downward trend continued throughout the first three quarters of fiscal 2023. However, the profit margin of the intelligent cloud business rebounded in the fourth quarter of fiscal 2023 and reached 48.4% in the first quarter of 2024, setting a historic record.

The decline in profit margins in the cloud business up until now is likely due to the spread of the cloud industry reaching a certain stage, and competition among companies has intensified. It means that due to the intensification of cloud competition, there were uncertainties where it was impossible to assert that Microsoft was by no means out of the way.

Currently, the profit margin of Microsoft's intelligent cloud business has rebounded drastically and hit a record high. This may be because AI support improved product competitiveness and price competitiveness, which had a positive impact on profit margins. Looking ahead, we need to keep watching to see if Microsoft's intelligent cloud business can maintain high profit margin levels.

One of the materials worth paying close attention to in the future is, after all,CopilotIt is. because thisThere is a possibility that it will promote an increase in the average price of Microsoft's Office servicesThat's why.

As the penetration rate of Copilot products improved, the profit margin of Microsoft's commercial business centered on Office 365 reached a new stage in the first quarter of fiscal year 2024, reaching a historically high level of 53.6%. In the upcoming financial results report, it is necessary to equally focus on whether Microsoft's commercial business can maintain high levels of competitiveness and profit margins.

In conclusion, to better understand Microsoft's financial results, it is necessary to carefully check sales and profit changes in all three business segments.

The OS device business is regarded as the “golden tree” of yesteryear, but market attention is low.

The intelligent cloud business was thought to be a growth engine in the past, but now the profit growth rate has stabilized and is even higher. As a result, operating margins are now higher than ever. In the new financial results report to be released soon, it is necessary to focus on whether Microsoft's growth rate will increase and whether it can maintain current profit margin levels. Also,Microsoft's commercial business saw significant changes in both revenue growth and operating margins due to the introduction of Copilot products. There is a possibility that this will have a big impact on stock prices.