Bottom-line: not far from our thoughts in the preview (here) that great execution from MSFT in Dec-Q meant not to press into results but remains a Best Idea (& Quad4) Short for what lies ahead.
MSFT missed the Street’s topline expectation by 1% and missed NG Operating Profit by 3% (MSFT introduced an As Adjusted for FX number that was 2% above Street).
Commercial RPO decelerated slightly from 31% y/y to 29% y/y, as backlog growth rebounded in December from a lackluster September-Q. The rebound also means that RPO Billings growth rebounded to -1% y/y from -3% y/y last quarter.
DR slightly re-accelerated but Billings fell to 2% y/y growth from 8% last quarter (and against easier y/y comps).
Azure constant currency growth fell from 42% y/y to 38% y/y (GAAP numbers in line with our model of growth descent from 35% y/y to 31% y/y).
OCF was in-line with our expectations at ~$11B but well below Street of $16B (as adjusted OCF was $13.5B). Capex was in-line with our & Street estimates, which meant FCF underperformed in the Q at $4.9B vs Street $10.5B.
Commercial bookings decelerated to 4% y/y growth (constant currency), while GAAP bookings recovered from -3% to 7% y/y. (As companies comp the F/X headwind into tailwind in 2023, will they stop reporting or focusing on constant currency numbers as the most accurate picture of the business? Maybe not MSFT but we can think of a few out there who will suddenly whistle an unadjusted tune...)
What quarterly OPEX reduction does a one-time charge of ~$1B imply? We are modeling NTM OPEX down 8% y/y, or $4B+. Did we miss the mark? We are hoping for more color from the call on this topic. Against over $14B in quarterly OPEX, a small cut will not satisfy, especially in light of recent hounds in the CRM den.
When we include our aggressive OPEX reduction estimates (albeit our revenue estimates need updating after the Q comes out), MSFT is trading at ~21x our forward FCF estimates. Meh.
We are staying Short MSFT. While Street estimates now likely reflect a trajectory of Azure deceleration, the point remains, Azure is decelerating and will continue to do so. We are in a difficult period for IaaS businesses where they must trigger elasticity and return to regular service price cuts to drive the next wave of computing adoption (without taking their foot off of the proverbial capex gas). Large lift and shift projects are unlikely to get started in 2023, leaving growth driven by ongoing migration projects, as well as the underlying growth of today's Enterprise customers in a slowing GDP and Macro environment.
Most of the rest of MSFT doesn’t get us excited either. Products are either washed out cyclically, or secularly overfed. To embrace this giant behemoth whose model is pulled in many directions (both slow and fast) requires a much better entry point, and/or the completion of the cyclical reset of growth expectations required.
