Morning Note: Market news and updates from Microsoft and Proctor & Gamble

Market News

Kamala Harris has wiped out Donald Trump’s lead in seven battleground states, riding on enthusiasm among young, Black and Hispanic voters, the latest Bloomberg News/Morning Consult poll showed. 10-year Treasury yields slipped to 4.14%, while gold moved up to $2,418 an ounce.

Amid a heavy day for corporate reporting, US equities moved lower last night: S&P 500 (-0.5%); Nasdaq (-1.3%). However, markets picked up after hours, with the S&P Futures currently predicting a 0.8% rise at the open this afternoon. Companies reporting results this evening include Meta, eBay, Boeing, Mastercard, ARM, and Marriott.

The buoyant mood continued in Asia this morning: Nikkei 225 (+1.5%); Hang Seng (+2.3%); Shanghai Composite (+2.1%). The Bank of Japan raised its key rate to around 0.25% in a decision that was widely telegraphed by local media. The central bank pledged to keep raising rates if its price outlook materialises and said it will reduce bond purchases by Y400bn a quarter. The yen trades at 151 to the dollar, versus a low of 161 at the start of July.

China factory activity contracted for a third straight month in July as the official PMI hit 49.4, matching forecasts. Ten-year yields fell to new lows.

The FTSE 100 is currently trading 1.0% higher at 8,355. HSBC is trading up 3% following the release of strong Q2 results and the announcement of a $3bn share buyback. Sterling trades at $1.2844 and €1.1868.

Brent Crude moved off its recent low to trade at $79.30 a barrel. US API crude fell by 4.5m barrels last week, the fifth straight drop and the longest streak of declines since January 2022.

Source: Bloomberg

Company News

Last night, Microsoft released results for the three months to 30 June March 2024, the final quarter of its financial year to June 2024. The figures were pretty much in line with market expectations, although the company saw a slight deceleration in its cloud business and warned it would spend more on AI infrastructure. The shares fell by 3% in after-hours trading, having been down 8% at one point.

Microsoft is a global leader in consumer and enterprise software, services, devices, and solutions, leaving it well placed to benefit from the ongoing shift to digital technology and several other secular trends including AI.. The group’s competitive edge lies in the strength and breadth of its portfolio of resilient and trusted technology which provides unique integration of its cloud-based products and services, covering productivity apps, infrastructure services, security, and communications. The group’s offering includes Windows, Microsoft 365 (formerly Office), Skype, Hotmail, LinkedIn, Bing, GitHub, Surface, Xbox, and OpenAI ChatGPT. Not only are the group’s products designed to work together but, for the customer, it is also more economical to bundle multiple products.

Its portfolio is being continuously enhanced through in-house product development and acquisitions, allowing the company to push through price increases and sell new products and services to a growing base of consumers. In addition, as one of the world’s three largest cloud companies, Microsoft Azure is benefitting from the migration of workloads from on-premise to public cloud platforms, a transition that we believe has further to go. With its stake in OpenAI and its agreement to be their exclusive cloud provider, Microsoft is well placed in the world of AI. Most recently, the group has released the Microsoft Windows Copilot, the AI assistant tool.

The group operates a user subscription model which generates a visible, long-term annuity revenue stream with higher margins and strong cash flow. In FY2024, the company generated revenue of $245bn (up 15%), gross margins of 70%, and operating margins of 43%. Microsoft has a very strong balance sheet and in addition to reinvesting cash back into high growth opportunities and M&A, the company has consistently increased its dividend and is repurchasing its own shares.

During the latest quarter, revenue grew 16% at constant current (CC) to $64.7bn, a touch ahead of the consensus forecast of $64.4bn.

·       Productivity & Business Processes generated revenue of $20.3bn, up 12% at CC, versus company guidance of 9%-11%. Growth was driven by Office 365 Commercial (+14%) and Dynamics 365 (+20%). 

·       Intelligent Cloud generated revenue of $28.5bn, up 20% at CC, versus the company guidance of 19%-20%. Growth was driven by Azure (+30%). Microsoft Azure’s is outperforming the other cloud providers due to its greater exposure to enterprise and hence, potentially more resilience, and its better positioning around AI workloads.

·       More Personal Computing generated revenue of $15.9bn, up 15% at CC, versus the company guidance of 10%-13%. Growth was driven by Xbox content and services (+61% due to the Activision acquisition), partly offset by a 9% decline in devices.

Other commercial highlights included 19% growth in commercial bookings and a 97% commercial revenue annuity mix. All cloud revenue growth by 22% to $36.8bn, just below management expectations.

The gross margin fell by one percentage point to 70%. At the total company level, headcount was 3% higher than a year ago. Operating expenses grew by 13%, mainly due to the Activision acquisition and investments in cloud engineering. As a result, the operating margin held steady at 43%. EPS grew by 11% at CC to $2.95, versus the market forecast of $2.93.

Microsoft spent heavily on capex, up 78% to $19bn in the quarter, mostly on new AI chips and high-performance networking for its datacentres. However, the group still generated strong free cash flow, up 18% to $23.3bn in the quarter and ended the period with net cash of $24bn. The company is authorised to repurchase up to $60bn in shares, with $2.8bn bought back in the latest quarter. The company also paid out $5.6bn in dividends.

On the analysts’ call, the group provided guidance for the financial year to June 2025: double-digit revenue growth; capex higher than in FY2024; operating margins down by 1%. Divisional revenue guidance was also provided for the current quarter: Productivity and Business Processes is expected to grow by 10%-11%, Intelligent Cloud by 18%-20%, and More Personal Computing by 9%-12%.

Source: Bloomberg

Yesterday lunchtime, Proctor & Gamble released results for the three months to 30 June 2024, the final quarter of its financial year to 30 June 2024. The figures were a touch below the market expectation on sales but ahead on earnings. The first half of the current financial year is expected to be similarly muted and in response the shares were marked down by 5%.

P&G is a global consumer goods company with annual sales of $88bn across a broad range of iconic brands including Gillette, Crest, Ariel, Head & Shoulders, and Pampers. The focus is on daily use categories. The group generates around half of its sales in North America, a fifth in Europe, and the remainder in emerging markets.

In the three months to 30 June, net sales were flat at $20.5bn, a touch below the market forecast of $20.7bn. For the full year, sales grew by 4% to $84.0bn against a challenging economic and geopolitical environment.

Organic growth, which excludes the impact of acquisitions, disposals, and negative currency movements, was up 4% in the full year, at the lower end of the group’s 4%-5% guidance range. Higher pricing contributed four points of growth to organic sales. Shipment volumes and mix were unchanged versus the prior year. In the final quarter, organic growth slowed to 2%, driven by a cutback in spending by price-conscious consumers in the US and Europe which led to slower growth for the company’s products.

However, growth was broad-based, with 8 of 10 product categories growing organic sales. Global aggregate value share was up on the prior year, with 30 of the group’s top 50 category/country combinations holding or growing share in the financial year.

The group operates across five divisions:

·       Fabric & Home Care (35% of full-year sales) grew by 2% in organic terms in the three months to end June, driven by home products.

·       Baby, Feminine & Family Care (24% of sales) was down 1%, held back by a decline in baby care products.

·       Beauty (18% of sales) grew 3%, with high single-digit growth in hair care offset by a flat result in skin and personal care.

·       Health Care (14% of sales) grew by 4%, driven by oral care products.

·       Grooming (8% of sales) grew by 7% as a result of higher pricing and volume growth from innovation.

On a currency-neutral basis, the core gross margin grew by 180 basis points in the final quarter to 52.1%, driven by higher pricing, favourable commodity costs, and gross productivity savings, offset partly by product mix and product reinvestments. The operating margin grew by 60bps to 24.6%.

Core EPS grew by 2% at constant currency in the final quarter to $1.40, slightly better than the market forecast of $1.37. Full-year Core EPS grew by 12% to $6.59, above the top end of the guidance range of 10%-11% as the headwind from higher commodity costs continued to ease.

During the full year, adjusted free cash flow was $16.9bn and adjusted free cash flow productivity was 105%, well above the 90% target. The group ended the period with net debt of $23.0bn and returned over $14bn of cash to shareholders through dividends ($9.3bn) and share repurchases ($5bn). The group has increased its dividend for 68 years in a row.

For the financial year to June 2025, the group expects to deliver organic sales growth (3%-5%), core EPS growth (5%-7%), and free cash flow productivity (90%) – each in-line with its long-term growth algorithm. The company also expects to pay around $10bn in dividends and to repurchase $6bn-$7bn of shares in the year. On the analysts’ call, the company highlighted the first couple of quarters of FY2025 are expected to be similar to the final quarter of FY2024.

Source: Bloomberg