29 January 2020 Equity Resoarch Americas / United States CREDIT SUISSE Microsoft F2Q20 Earnings - Accelerating Azure with Leverage Software I herease Target Price. Strong P2C rosuts ratfim our thess that Mcrosot is capturing a generational opportunity in enteprise tach given its rapidy growing eloud business, hoatty on-prom, and strong cash peneration. While skeptics may question the margin impact of cloud mix shitt, we underscore Asure GM progression and FY20 OM now guided +2 pts. y/y rs. pror 'sightly up'. Asure reacceleration validates Microsot's hybrid and enteprese adrantages, despite incressing investrents by public doud evals. Mcrosott 365 strength should cortinus to drive CIfice 365 ARPU upit, and help sustain the Windows business post retresh cycle. We nse our Target Price to $100 (from $180 ) and raterate our Outperform nating. - Arure and Server Products = Best Friends Forever: Asure gow +64\% y/y cc, with gross magins conthuing to scale up (CSe 55\%, +1 pt q/9), despte mox headwind. Adopton of Ature Hybrid Benefts by one-thind of Whdoms Server and SOL Server enterprise customers speaks to Microsoft's strategic rolationships and Arure synergies with the Server products business (+8\% cc ex-Wh Server 2008 EOL impact). EMS installod base /355 y/y, surprisingly stablo vi. F1Q, with +7mn users q/q and better than we expected. Wo forscast Acure F3OE / FAOE growth at 50%/47% y/y. - Windows 10 Retresh and M365: 18 8/y Whdows OEM growth romains elovated, divon by Win 10 oftesh, and Cr20 will thely benoft from an improwng PC supply chan. Exceptenal 27% y/y ec growth in Windows Comerercial products and Cloud services is diven by strong Mcosoft 365 adoption, which wo belewe could be a muls-year phencernenon for the Windows business, abet limpy. MSFT Target price (12M, us\$) 190.00 Outperform Research Analysts Brod Zelnick Sred Tahs suleem, CFA Pay meoonough, CrA Commercial users have already migrated to 0385 , though +8\% Office 365 impled ARPU growth validates the long ferm E5 opportunty (our sumey work imples 20% of max). Office 2010 EOL in October " 20 may also yield upside to FV20E/FY21E Strest OSe5 Commerdal. estimates of 22%/18% (pre-earnings). Estimates and Valuation: We update our FY2O EPS to $5.53 from $5.23. Our FY2OE / FY21E Operating Cash Flow estimatos stand at $55.00n(+6% y/y) / $00.86n(+9%y/y). Our $190 target price imples a Cr20 P/E multiple of 31.1 (excl. SeC). Fisks indude public cloud competsion and macro uncertainty. In 'FORECAST Financial'Statements' in a table beginning in Row 36, we deseribed several types of Investment Theses. Even the simplest forecast utilizes a basic investment thesis or viewpoint. Which investment Thesis type best matches the CSFB analyst's outlook for Microsoft? \begin{tabular}{l} Create a New Market \\ B Gain Share of an Existing Market \\ \hline C Disrupt a Market \end{tabular} Which of these descriptions best summarizes the analyst's Investment Thesis? A Microsoft is capturing share of the high growth cloud services market with its Azure offering while maintaining decent gre 8 Microsoft is capturing share of the high growth cloud services market with its Azure offering but margin erosion related to C. Microsoft is capturing share of the high growth cloud services market with its Azure offering but the 0365 product cycle i ent Thesis