Investing Insights: Microsoft & Watsco Earnings Analysis with Fiscal AI

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2:11All right, folks, welcome to Investing for Beginners podcast. Today, Andrew and I, we've been on vacation a little bit. So we're going to use Fiscal.ai today to help us get caught up on some companies. So we haven't really been paying a whole lot of attention to the market, which it can be a good thing. It can be freeing. Try it sometime. It's actually a wonderful experience. But Andrew and I thought we would talk through some of the companies that are in his portfolio. And we're going to use fiscal.ai today to kind of get caught up on how those companies are doing. Some of them, a few have had recent earnings calls and a few have had a little more distant time, but still it's a great experience and you can kind of see how we can use this platform to get caught up quickly.

2:52So with that, let's start talking about companies. I think the first one on the agenda is Microsoft. Yeah, Microsoft. Everybody wants to hear it, right? Because of AI and what's going on with AI. And how does Microsoft sit? Because if you look at the way that they sit in the ecosystem, they're one of the cloud computing companies, AWS, Microsoft, and Google Cloud. I almost forgot that one. and and so as these companies spend on ai they need this compute microsoft's been making a killing so i'm pulling them up on fiscal and i'm going to see segments and kpis and just kind of see where we are from a quarter to quarter basis and i know that they just did the 10k and so the quarterly numbers are there and also so that means the annual numbers are there as well maybe maybe i start with the investor relations page so we can go and i i think we talked about this maybe a month ago you can go and you can click in the individual transcript and you can get the ai summary and that can really help summarize things for you.

4:10So big highlight numbers, revenue up 17%, constant currency. That's crazy for a company of that size,$76 billion. By the way, we were up 17%. Okay. I'll take some of that. Diluted EPS up 24%. Microsoft cloud revenue, which everybody wants to know about up 27%. Diluted earnings for the year up 16%. So just when are these high numbers going to stop like honestly yeah right i mean it it is a little mind-boggling that a four trillion dollar company almost is growing revenues at 18 a quarter well maybe not a quarter but last quarter they grew 18 in one quarter that's just kind of nuts yeah so the some of the summary on their ai driven growth obviously cloud dominance commercial bookings surging.

5:08If you know the basics of Azure versus AWS, Azure has always positioned themselves for kind of Fortune 500 bigger commercial customers. So the fact that their bookings are up 37%, I think, tells you that that value proposition that they're offering to, it's one of those things, right? You always want to look for statistics that kind of back up whatever narrative or whatever priorities or advantages that management's talking about. Microsoft has talked about how they see themselves as that solution for commercial. And just to see that up 37%, up 30 % constant currency, that's huge. I think it shows that they're executing on their plans.

5:55Yeah, for sure. And along with that, they did see a decrease in the gross margins for the cloud. And they talked about that really being the impact of the AI infrastructure. Primarily, I'm going to guess with the CapEx spend that all the hyperscalers are starting to double down on. And so it's going to be interesting to see how that plays out in the coming quarters, in the coming years. and I think that's something to definitely keep an eye on. And so it is interesting to see that it did dip a little bit. I mean, 68 % is still nothing to sneeze at for sure, but it is something I'm definitely going to keep an eye on.

6:37You mentioned the gross margin. Talk to us about how that, you own Microsoft just like I do. So when you talked about that gross margin dipping, what goes through your mind when you see that? How do you interpret that as a long-term shareholder? it's something that I'm going to keep an eye on for a couple reasons. Number one, it ultimately leads to more free cashflow for the business, which allows them to easily or more easily reinvest in the core part of the business, i.e. the AI infrastructure and the cloud and all that stuff. And if you start to see that start to dip, that could mean that they either are struggling with pricing power with the with the expansion of ai or that they're struggling with finding a way to monetize it effectively or they haven't been and so that that money that they're spending on the capex the cost of trying to grow and stay relevant in the ai race and the cloud race uh is it could potentially impact the profitability of the business not only in the gross margins but all the way down to the free cash flow margin.

7:53And if you start to see those things kind of slip a little bit, that could be an indication that maybe they're overspending, maybe they overestimated the demand for what they were seeing, or maybe they are lagging in being able to have pricing power. And so those are some of the things that I guess when I'm looking at these kinds of numbers, that's one of the things that I try to pay attention to, particularly in the segment, different segments of the business. And because I know that this is a big part of Microsoft's future growth story, it's definitely something to keep an eye on. Do you have that pulled up?

8:29And maybe we can share it for people who are watching on YouTube. If you don't follow us on YouTube yet, you can search Investing for Beginners podcast. And we do have the podcast on there too. And if we have more visual episodes like this, where we're looking at charts, it can help definitely to see when you talk about the decline in gross margin was it was it big was it small a lot of times you can answer that visually and to your point about being able to see it between segments that can also be very helpful okay so when you look on fiscal.ai you can switch from annual to quarterly down here and so that's what i did and i switched from normal which is annual and then i switched and I'm going to switch it back to quarterly.

9:20And when we do that, we can see that over the last six to seven quarters, there's been a gradual decline in the gross margin. Now, this is the whole business, so it's not just defined to the cloud part that we were just discussing, but it is showing a gradual decline in gross margins, which could indicate a lot of things, but it could indicate that they're struggling to find a product market fit, pricing power. The costs are just a little bit higher than maybe the demand is right now. And as they continue to spend more and more on CapEx, you should probably expect to see some compression in the gross margins over a period of time.

10:06And hopefully that will start to rebound. And that's one of the things that I look at when I'm looking at a company like Microsoft or Google for that matter. Yeah, and since my mind's still on vacation mode, I'm leaning a little more on AI than I normally would. So you all have to forgive me for that. But one of the things I did say, which makes sense, Azure, cloud, it's all lower margin than the other stuff. So if that's growing faster than like Microsoft Office, which is software, which has a higher gross margin, then that gross margin will naturally come down and that might not be indicative in this instance of a company as a whole having a problem with pricing power.

10:47It's just if your cloud segment's growing so fast that those revenues are lower margin and growing faster, then you can see some of that reduce the gross margin. That's what the summary said here when it was summarizing the conference call transcript and talking about how Amy Hood, the CFO, talked about some of that, it was attributed to that sales mix shift towards Azure and the lower Microsoft Cloud gross margin. So that can be a helpful way to kind of double-check your thesis or if you're in vacation mode like me and don't feel like doing super deep thought, that can be a great way to do it too.

11:26So all in all, I mean, those are pretty positive. There's got to be some negatives in the report, though. I mean, it can't all be rosy and cheery, right? So what I did is I like to get perspective. And if you can do this easily, then you can see how market share shifts over time. And that can sometimes tell you the competitive dynamics between companies. So in the charting feature, maybe I can pull this up now. My turn to share screen. So what I got here is you can put in the companies and then you can put in KPI metrics. So I put Microsoft's Intelligent Cloud with Google Cloud Revenue with AWS Revenue.

12:10And so Microsoft up 23 % annually versus Google 28 % and Amazon AWS 15%. Google growing the fastest, but like you can see in the chart, it's also the smallest. So it's coming from a smaller base. Microsoft also well actually based on the chart here you can see in Q2 25 they've actually surpassed AWS which is interesting. I know I'm sorry AWS hasn't reported yet for Q2 but Microsoft's cloud is now higher than AWS was in Q1 so we'll see where AWS falls for Q2 but it's really closing the gap. I'm sorry for people on audio, but we're talking about 16 versus 20. If you look back three years ago when you compared Microsoft's cloud to Amazon's cloud, AWS, and Microsoft's now closed the gap last quarter, it was 26 versus 29 with this new jump with Microsoft almost at 30 billion for the quarter.

13:20it'll be interesting to see how that how that compares to AWS I mean regardless you're talking about high growth rates pick your poison do you like Coca-Cola, do you like Pepsi at this point there doesn't seem to be one dominant winner I haven't seen anything in the research to kind of indicate that one would beat the other and so it's interesting to just kind of watch it play out but if you can keep the big picture in mind to me as a shareholder I just kind of see things as like, all right, things are going along. And obviously, the high growth numbers are appealing. But we're not counting on it because we bought the stock with a margin of safety.

14:06And so that's hopefully the mentality. And that's kind of the way they approach earnings in a very, very exciting industry. Yeah, very exciting industry. And I think maybe something else to kind of point out a little bit too is the fact that when you look at the earnings of the company, typically, well, maybe a better question for you. How many times in all the companies that you've invested in, have you ever seen a report that you're like, I am out? Right. It's very few. Yeah. Yeah. So I think the thing to keep in mind when you're looking at quarterly reports is that this is a snapshot in a very short amount of time.

14:52And it can be indicative of things going really well or maybe not so well. But it also probably generally is not a, okay, this is so bad, I'm out kind of thing. So I guess the point I'm trying to make is try not to get too excited either way, positively or negatively, on an earnings report and just kind of use it as a way to update your thesis as it's going along. I'm going to pull up CapEx just to see I know that's been one of the one of the worries right for investors these days is how much of this CapEx is going to will any of this end up biting the companies you have something as new as AI and cloud and compute and all of that with all that spending is it something to worry about right Right.

15:49So I'm going to go, let's call it from Q2 2020. So we're looking at a five-year period. CapEx a little bit higher than where those revenue numbers were for the cloud segments. I'll go to 2022 because there was no KPIs for Intelligent Cloud for Microsoft before then, based on the way they did segments. So Microsoft's definitely increased CapEx at a greater rate than it has its cloud, but it's still CapEx is less than revenues. So we could stack those bar charts if we wanted to kind of see that. Amazon's also spending more than their revenue and Google even more so. So interesting to see. Google's actually spending more on CapEx than its cloud revenues bringing in.

16:42So that might be something about, is there CapEx outside of the cloud segment? That could be one factor. Second factor is maybe it's just the cloud segment is too small for that to balance out. definitely when it comes to Google versus Microsoft versus Amazon, CapEx, Google's actually now spending more than Microsoft, which I wouldn't have. That's not something that was always necessarily the case. And now they keep kind of going back and forth between the quarters. I'm not going to lie. Running a small business has been stressful lately. Swamped in paperwork, different state agencies, and got all these expenses to track and everything.

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19:58Download my ebook for free at stockmarketpdf.com. Anything else about Microsoft that you think is pertinent to look at as you're kind of just looking at more of an overview and trying to catch up on a business? Yeah, it's a good question. Yeah, it's a great question. And I'm going to pull up my custom KPI metrics that I've talked about in previous episodes. And so because we've talked about how CapEx is such a big thing, and obviously compared to cloud revenues, it's a big percentage. I like to use that CapEx ratio. So CapEx to revenue, we can look at that. You can see in the chart, it's kind of hockey-sticked up and to the right.

20:42So that trend that started in 2024 has now continued into 2025. We'll see how sustainable that is. But I can also pull up, let's say, return on invested capital. And it's starting to come down a bit, but it's still at a healthy clip, 20%. The bullish person in me says everything's fine, right? but a skeptic can very fairly say hey maybe this spend is a little too aggressive so I asked kind of earlier you summarized the transcript and everything sounds amazing double digit growth growth in the mid teens growth 30 % for commercial or whatever it was but if you see a continuation of these trends at what point does it start to get concerning and we don't have an answer for that yet kind of to your point though like would i sell after let's say roic plummeted and the capex was just too too extreme and i didn't like it would i personally sell probably not but would i use that as an opportunity to say hey maybe i need to redo a deep dive into the business and question whether I was too optimistic about their moat or management's capital allocation strategies, those would be more of the utility behind looking at these numbers, looking at these trends.

22:18And luckily for Microsoft, it's based on the end of the fiscal year. So we can see those year over year trends. And yeah, not a great thing to see ROIC go from 24 to 20. no no but it is it is also maybe not unexpected as you see a big increase in in capex spend yeah you probably would kind of expect to see a a dip in return on invested capital but like you said it's definitely something you want to keep your eye on and see as they continue the you know the the capex spin wars with the big companies you know including meta you want to see at some point you want to see that turn right you want to see the roic start to turn around to go the other direction you want to see revenues you know start to produce more profits and if it doesn't then that's when and not just microsoft but just across the board all the companies you can start to question whether maybe the the the ai race if you will is maybe not as profitable as maybe we were led to believe and that could be that could be something to think about too it's a really great point yeah pulling up eps and just kind of looking at that alongside it's it's growing pretty nicely so i wouldn't be too concerned about it now but to your point like if it's if there's a rug pull situation.

23:43Yeah, that can be concerning. The last tidbit I'll add to Microsoft just because I have to be the bull. Still net debt free. So the fact that they don't have to lever up to do something like this you compare that to a lot of different companies, a lot of different industries, they would kill for a situation like that. So Microsoft net debt free. Spend away. Spend away. You're right. And kind of to that point I was reading yesterday about Meta's latest earnings call, which we're not going to talk about today. But one thing I do want to add is they mentioned they are debt free at the moment. And they mentioned on the call that they would be willing to take on debt to fund their AI ambitions.

24:27And so that's, I mean, that's big news because they've burned through almost$30 billion in cash in the last couple years. And they went from$45 billion to like$12 or$13 billion in cash on their balance sheet. And now they're talking about taking on debt to fund this huge AI project. So it's definitely something to keep your eye on as we watch these companies kind of go through this. Yeah. Super interesting. Yeah. Super interesting. All right. So now that we've kind of got caught up on Microsoft, let's take a look at another one. Let's take a look at Watsco. Yeah. When we were trying to decide which companies do we want to look at, one way, like I've mentioned in the past, you can go to the dashboard, click on news and kind of see who has reported.

25:20And it's all sorted by date. Another way is just like, hey, where have stocks moved in the last week? And you can see for your own portfolio. And if I sort, Watsko's second worst performer in the last week, that lends me to think, okay, maybe they had that earnings call. And sure enough, they did. And Wall Street didn't like it.

25:42Yeah. So if we go back to the investor relations tab and look at the AI summary of the quarterly call, we can see a few things that kind of jump out. Revenues decreased 4 % to 2.06 billion in Q2. And gross profit also decreased 4 % to a record 603 million. So those are a couple things that just kind of jumped out right away. Earnings per share was up, which is nice. and they still maintain a good solid financial base with 293 million in cash, no debt, and 3 billion in shareholders' equity. So yeah, those are nice things to see. I asked the AI, what were the analysts nervous about? So one of the things I said, 4 % decline in sales, even though pricing was up double digits, 4 % decline in sales.

26:40You can excuse it based on the summer season, which was one of the reasons listed on here. But is it indicative of something that's more concerning? That could be something that Wall Street's worried about. And then they also ask questions about inventory management. The fact that it peaked at about$2 billion. There's an A2L refrigerant transition. So it's the type of products for the equipment that they're selling, the HVAC that they're selling. So that's a concern, especially with inventory turns now between 3 to 3.5, which is below COVID. I'm sorry, it's below the pre-COVID level of 4.5. Again, nice to see kind of all these numbers and not have to read through the pages and pages of transcripts.

27:30But that's something to look at, right? inventory management. I've definitely held stocks like Target where inventory skyrocketed and it did not turn into revenue. And then the stock did really poorly for a long time after that. So could that be a situation going here? Was it maybe just a valuation sell-off? Those are all potentials for a company like Watsko. Bitcoin is one of those really divisive topics. And depending on where you stand on it, either you ignore it or you can see its future utility and the things it powers. And so in a time like today, we're all wondering how much exposure makes sense and how can I get that exposure in a simple and easy way.

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28:49And don't forget this part. Send at least$5 to a friend in the first two weeks. Terms apply. Bitcoin services by Block, Inc. See the Bitcoin disclosures at cash.app slash legal slash podcast. This episode is brought to you by Facebook. So you were scrolling on Marketplace and there it was, the bike you'd been searching for. You sent a message and it turned out the seller was super chatty, kind of funny, and an avid cyclist. The next thing you know, you're in a cycling crew. Well, a community cycling group. the thing about facebook you might find more than what you're looking for from a browse to a bike ride this summer find more on facebook yeah for sure i have heard them mentioned you know to pile on the ai pile as they could you know could they be a beneficiary of you know the build out on data centers and things of that nature what are they aligned in that area that that could be a benefit for them?

29:56I don't know. That's a good question. I don't. I've seen people bandy about some different companies and refrigeration in particular as a method of obviously cooling the data centers because they get so hot that that could be a benefit to some of the larger refrigerant, you know, air conditioning businesses, i.e. WOSCO, train, carrier, things of that nature. So I was just curious if they have ever mentioned that specifically. Yeah, I mean, they might have. It's not a segment broken out in their financials, so my guess is as good as anybody else's. Okay. If you pull up inventory turns, which I can show...

30:42... We see a pretty steady decline since there was a peak in 2021, so great inventory management then, and then that's starting to fall off. I'm also going to pull up just like price to earnings just to show. It's definitely on the higher end. What's nice about these charts is you can add like an average line, median line. So let's do an average line. So the average over the last, call it 9, 10 years, has been around 28%. 28 on the PE and it's out of 35. So you can see it kind of like peaked up in end of 24 PE got as high as a 40. If I'm in the surface, like again, we're, we're looking at earnings to say, all right, does this need a deep dive or is it kind of like steady as she goes?

31:36Cause as an investor, it's really not practical to do a deep dive for every company, every single earnings call. what do you what do you say based on some of these metrics i would say that there is probably at this point nothing to be overly concerned about but maybe if you have extra time maybe it would be you know behoove you to look into why inventory turns have continued to to lag uh because that's that's an important part of their business that might be worthwhile to look into to see if there's some sort of industry pressure or if there's some sort of supply chain issue that they're having trouble with uh and just try to get to the bottom of that but it isn't anything like you know shockingly like would you would you call it rug pull like to say you know holy crap this is something i gotta look into it's like okay maybe maybe that'd be something i could put on my list of things to do at some point but i wouldn't rush out and do it like tomorrow yeah Yeah.