CS very bullish on MSFT Love this statement
we believe that Microsoft Azure will emerge as the clear #2 market share player in public IaaS and will arise as the leader in public PaaS.
Lean, Mean, Cost-Cutting Cloud Machine
Results. Microsoft reported FQ4 results of EPS of $0.62 and $22.180 billion in revenue versus consensus of $0.58 and $22.056 billion, respectively. We are adjusting our FY2016 revenue to $92.891 billion from $97.085 billion and our EPS from $2.87 to $2.72. We are also adjusting FY2017 revenue to $101.473 billion from $104.450 and our EPS from $3.18 to $3.23.
Analysis. Microsoft reported revenue, margins, and EPS above consensus expectations due to strength in Office 365 and hardware, along with better than expected operating expense controls. Office 365 and Azure continued to show strong performance—with Office 365 reaching 15.2 million consumer subscribers (an increase of 171% year over year) and Commercial Cloud revenue growing 88% year over year (96% CC).
Although management guided FQ1 revenue and EPS below consensus (largely due to a greater-than-expected FX impact), we believe that PC shipments and Windows revenue are poised to improve into FY2016, particularly in H2 due to (11) the release of Windows 10 in late summer driving an "inventory restocking" at OEMs and in retail, (2) the release of Skylake from Intel, (3) stabilization in commercial demand following difficult comparisons due to the end-of-life of Windows XP, (4) a slowdown in the tablet market, and (5) increased popularity of hybrid laptops. Furthermore, Microsoft's margin outperformance this quarter and management's guidance for declining OPEX year over year in FY2016 (which was below its prior guidance) reflects continued cost control discipline. Outlook. We believe that Outperform-rated Microsoft can return to double-digit EPS growth by (1) continued rationalization of its cost structure, (2) further divestitures/exits of non-core businesses, (3) optimization of its capital structure, (4) stabilization in Windows pricing, and (5) an accelerated shift to Office 365 (i.e., "pull a full Adobe"). Furthermore, we believe that Microsoft Azure will emerge as the clear #2 market share player in public IaaS and will arise as the leader in public PaaS. We reiterate our Outperform rating and $55 target price.
