Softchoice Corp T.SFTC

TD

[retiredcf]

Cloud Strength Helps Deliver Beat for Microsoft Event

Yesterday after market close, Microsoft reported its Q3/F22 results and provided its Q4/F22 outlook.

Impact: SLIGHTLY POSITIVE read-throughs for Softchoice and Converge

Another beat. Microsoft reported Q3/F22 revenue of US$49.4B, operating income of US$20.4B, and Adj. EPS of US$2.22, above consensus at US$49.1B, US$20.1B, and US$2.20, respectively.

Key highlights include:

• Server products and cloud services revenue increased 32% y/y in cc, up from 29% growth last quarter. Azure revenues grew 49% y/y in cc, up from 46% growth last quarter.

• Office Commercial products and cloud services revenue grew 14% y/y in cc, same as last quarter. Office 365 Commercial revenues grew 20% y/y in cc vs. 19% growth last quarter, while Dynamics 365 revenue grew 38% y/y in cc vs. 44% last quarter.

• The Q4/F22 outlook for Intelligent Cloud (includes Azure) and Productivity and Business Processes (includes Office 365) implies strong but moderating growth. In particular, Azure revenue growth is expected to be ~200bps lower in cc vs. Q3/ F22 due primarily to workload optimization.

• In response to potential macro concerns, CEO Satya Nadella stated customer conversations indicate IT budgets/digital transformation projects are not places for cuts with some projects key to accelerating plans.

  Strong Google Cloud growth. Also yesterday, Google reported its Q1/F22 results. Google Cloud revenue (includes GCP) was US$5.8B (up 44% y/y).

  Softchoice read-through: Slightly positive. We believe Softchoice could benefit from the pickup in Azure growth, as Microsoft's largest N.A. Azure partner. Although Azure growth is expected to moderate slightly in Q4/F22, it could be temporary (workload optimization) and the implied growth is still in-line with F2021/22 levels.

  Converge read-through: Slightly positive. Like Softchoice, we believe Converge should also benefit from the continued strong cloud growth, albeit to a lesser extent given its (more hardware-centric) revenue mix.

  We believe the strong Q1/F22 results and outlook from IBM last week is likely to have a bigger impact, with Software up 15% in cc (Red Hat up 21% in cc), although Infrastructure remains soft (flat y/y in cc). The improved F2022 outlook (cc growth expected at the high-end of its mid-single digit guidance range) also bodes well for Converge, in our view.