Company Updates: Microsoft and Danaher
- By Christopher De Sousa, CIM® | Portfolio Manager
- 4 Min Read
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DANAHER
Danaher is a leading global life sciences and diagnostics company that contributes to the discovery, development, and manufacturing of life-changing drugs and therapies.
Danaher is off to a good start to the year with better-than-expected first-quarter revenue, earnings, and cash flow. Order trends in the bioprocessing industry have shown improvement, with product orders increasing mid-single digits sequentially. This is a promising development, considering that historical trends have typically seen a decline in orders between the two quarters due to seasonal trends. Book-to-bill ratio increased to approximately 0.95—the strongest in at least two years. Book-to-bill is a ratio of orders received to the amount billed for a specific period.
Bioprocessing orders have been depressed over the past two years because of customers working through their excess inventories. Customers had stockpiled instruments and consumables in response to global supply chain disruptions and capacity concerns during the pandemic. Danaher reaffirmed that customers in developed markets (e.g., North America and Western Europe) are returning to pre-pandemic ordering patterns with inventory de-stocking trends to conclude in the second half of 2024. To our surprise, Danaher did not raise its full-year guidance despite good results and the recovery in bioprocessing demand.
Danaher still expects a gradual improvement throughout the year, with core revenue growth of high-single digits or better, as they exit 2024 and head into 2025. When asked about the guide, Danaher’s CEO Rainer Blair said that they are looking for order momentum to continue to build through the current second quarter. While there’s an improvement in the biotech funding environment—a positive indicator for the long-term health of the bioprocessing market—Blair has not seen that translate to orders yet.
Underlying trends in the biologics market remain strong. The demand for biologic medicines is expected to increase at a high-single digit rate, if not more, in 2024. There’s a surge in the number of therapies progressing through the development pipeline and making their way to the commercial market. In 2023, the FDA approvals for biologic and genomic medicines witnessed a growth exceeding 50%. These trends give Danaher confidence in achieving high-single digit long-term revenue growth for its bioprocessing business.
We continue to hold the view that Danaher is well-positioned to take advantage of the long-term secular growth trends in the biologics market. The conservative guide might set up for a possible “under-promise, over-deliver” situation in 2024.
MICROSOFT
Microsoft reported another quarter of top and bottom-line double-digit growth and continued market share gains across the business. Microsoft saw a 17% increase in revenue, reaching $61.9 billion, while its profits saw a growth of 20%, amounting to $21.9 billion in the quarter ended March. Excluding Activision Blizzard, organic revenue increased by 14%—which is quite remarkable considering Microsoft’s scale and size. Now valued at $3 trillion, Microsoft is forecasted to generate revenue of approximately $245 billion in fiscal 2024. Microsoft’s leadership in AI and cloud businesses has greatly contributed to the company’s growth and continues to be a long-term growth opportunity.
Azure—Microsoft’s public cloud computing platform—grew by 31% in the quarter, an acceleration of 3 percentage points (up from 28% in the previous quarter) and the fastest rate in more than a year. The strength came from both cloud infrastructure and artificial intelligence. The core Azure business contributed 24 percentage points to growth, an acceleration from 22% in the previous quarter. Growth was driven by a pick-up in data migrations to cloud infrastructures. Azure AI accelerated as well and contributed 7 percentage points to growth. However, we need to keep in mind that Azure AI experienced capacity constraints due to strong demand for AI. This means AI services growth could have been much better.
Microsoft is seeing strong Azure commitments and renewals, with the average contract increasing in size and length. In the quarter, the number of $100 million-plus Azure deals increased over 80% while the number of $10 million-plus deals more than doubled. As a result of strong demand for larger and longer Azure contracts, commercial bookings growth jumped 31%. Microsoft Copilot, the company’s new Generative AI (GenAI) personal assistant, will be, in our view, a key driver to furthering AI and cloud adoption across various industries and markets. Today, nearly 60% of the Fortune 500 use Microsoft 365 Copilot. Microsoft expects revenue growth for Azure to be 30% to 31% in the current quarter with continued contributions from AI and cloud migrations.
We think Microsoft is best positioned to deliver double-digit sales and earnings growth through the next five years. The AI, GenAI, and cloud growth story is still in the early innings.