Microsoft: Street Warms to CFO Hood’s ‘KPIs’ Of Cloud – Barron’s
Shares of Microsoft (MSFT) are down 97 cents, or 1.4%, at $68.35, falling with the broader market’s decline, after the company yesterday held its annual analyst day meeting in Seattle, taking place the same time as the company’s “BUILD” developer conference.
A replay of the day’s presentations is available on Microsoft’s investor relations Web site.
If there was one thing that seems to echo through today’s coverage from the sell-side, it is CFO Amy Hood’s “KPIs.”
Her talk ended the day’s presentations, which was short on financial forecasting, but long on discussion of the various unofficial “key performance indicators.”
The talk was a bit vague, indicating spending will rise in fiscal 2018 starting in July, putting pressure on margins, though growth will come as well. Not everyone was satisfied with that, but the KPIs, again, struck a chord.
In his opening pitch, Chief Executive Satya Nadella told the Street that Microsoft has “spent a lot of energy and time building connective tissue between our sense of purpose and the enduring mission,” and “having a first class world view in terms of where is technology going,” and being able to make sure that we’re placing bets on the products that we build.”
Hood’s point with the KPIs was that Microsoft’s various software offerings — Windows, its Azure cloud computing service, LinkedIn, its “Office 365” online productivity suite — feed into one another more than is reflected on the income statement.
“In your mind, if you can almost think about which ones [KPIs] relate to each other in a per-user motion, they don’t correspond to our reporting segments,” she said. “Many of our motions are fundamentally connected to each other, but not connected within a segment. And so the appreciation of what really moves together.”
That kind of “holistic” approach, some are calling it, seems to have resonated with the Street today.
Brent Bracelin with Pacific Crest this morning reiterates his Overweight rain on the shares, and a $78 price target, writing that both events “increased our confidence in Microsoft.”
“It is now in a prime position to benefit from multiple tailwinds that should positively impact its growth profile in cloud for several years.”
He notes Microsoft’s move to a “more holistic” approach to cloud:
Management used the Build developer conference as a forum to unveil a new strategic vision. It is migrating from a mobile-first and cloud-first strategy that it outlined three years ago to a more holistic approach in which it plans to bridge the intelligent cloud with the intelligent edge.
And Bracelin lauds the company’s “confidence” in its “commercial cloud” business:
The mix of Office 365 seats is tracking ahead of its 50% goal for F2018; it raised the target to 65%-plus for F2019. The ARPU expansion could be even stronger with increasing confidence that customers who embraced E3 upgrade to E5 over time. Dynamics 365 and LinkedIn revenue combined could exceed $5 billion in F2018. Azure growth should continue to outpace these segments, yet management still expects to see improving gross margin within commercial cloud, implying a meaningful lift in Azure gross margin.
Stifel Nicolaus’s Brad Reback reiterates a Buy rating, and a $73 price target, “made a solid case how its numerous business units, especially Azure and Office 365, create a positive flywheel effect that should drive healthy top-line growth and improving profitability in coming years.”
He acknowledges that some may be dissatisfied with the vague financial remarks: “Given the massive opportunity and a $4.5T TAM, Microsoft expects opex to grow in FY18, but did not quantify said growth, which may leave some investors disappointed.”
“That said, we continue to expect this management team to remain quite disciplined around spend and more importantly continue to believe gross profit dollars will grow faster than opex dollars, and in turn deliver operating profit and FCF growth in FY18 and beyond.”
Kevin Buttigieg with MKM Partners , who has a Neutral rating on the shares, writes that the company was “probably more optimistic qualitatively about its positioning and future prospects than we have seen them before, but quantitatively more vague than we expected or than they had been in the past.”
He goes on, “The lack of quantitative clarity suggests that MSFT is still in more of a financial transition than many likely believed at this point, but many may be willing to look past that thanks to MSFT’s palpable enthusiasm.”