Technology – Software & Services | Europe December 14, 2025 12:01 PM GMT Weekly Reboot – Oracle results spark investor concerns This week, we share key research from our global MS colleagues, including on latest results from Oracle and Adobe. We also share perspectives on Microsoft's recent M365 price increases, key catalysts for Meta to outperform in 2026, and the rising importance of cyber risk management. Read-across and other relevant research: Oracle Corporation: 2Q26 Results – Resumption of Disbelief? ...

Core Insights - IBM is experiencing significant growth in its Software segment, with Q3 revenues reaching $7.21 billion, a 10.6% increase from $6.52 billion year-over-year. Net income rose to $2.37 billion from $1.97 billion, with margins improving to 32.9% from 30% [1][9]. Software Segment Performance - The growth in the Software segment is primarily driven by Automation, which saw a 22% increase during the quarter. This growth is attributed to the rising demand for digital transformation and AI integration across various sectors [2]. - IBM's Automation portfolio provides comprehensive solutions aimed at optimizing operations and enhancing cost efficiency [2]. Hybrid Cloud Growth - Hybrid Cloud continues to be a key growth driver for IBM, reporting a 12% year-over-year revenue increase in Q3. All major subscription offerings gained market share, reflecting the effectiveness of IBM's hybrid approach [3]. - The company anticipates generating $7.67 billion in revenues from the Hybrid Cloud segment, indicating an 18.2% year-over-year growth [4]. Strategic Acquisitions - IBM is set to acquire Confluent, a leading data infrastructure company specializing in real-time data streaming. This acquisition aims to enhance the integration of applications, analytics, data systems, and AI agents, thereby improving resilience in hybrid cloud environments [5]. Competitive Landscape - IBM faces competition from Microsoft and Oracle. Oracle reported cloud revenues of $7.97 billion, a 34% increase year-over-year, while Microsoft's Productivity & Business Processes segment generated $33.02 billion, up 17% year-over-year [6][7]. Valuation and Earnings Estimates - IBM shares have increased by 35.6% over the past year, compared to the industry's growth of 73% [8]. - The company trades at a forward price-to-earnings ratio of 25.67, which is higher than the industry average [11]. - Earnings estimates for 2025 have risen by 2.43% to $11.39, and for 2026, they have increased by 2.34% to $12.23 [12].

Summary of Microsoft 2025 Conference Call Company Overview - **Company**: Microsoft (NasdaqGS: MSFT) - **Date**: December 02, 2025 - **Speaker**: Rajesh, leading Experiences and Devices at Microsoft Key Points Industry and Company Insights - Microsoft operates in the software and technology industry, focusing on productivity tools and cloud services, particularly through its M365 and Azure platforms [3][4][8] Revenue Streams and Growth - The M365 and Office 365 portfolio is a significant revenue driver, growing at 15% year-over-year, with over 400 million paid subscribers [8][9] - Seat growth is reported at 6%, driven by small and medium-sized businesses, despite maturity in the enterprise space [16][9] - Average Revenue Per User (ARPU) growth is attributed to: - Customers opting for the full M365 suite - Increased adoption of the premium E5 offering - The introduction of M365 Copilot [11][18] M365 Copilot and AI Integration - M365 Copilot is becoming a key driver of ARPU growth, with daily active engagement more than doubling over two quarters [26][30] - 90% of Fortune 500 companies are reported to have adopted Copilot, indicating strong market penetration [30] - The integration of AI is seen as an opportunity for growth rather than a threat to seat numbers, with the expectation that organizations will require more digital agents [17][18] Customer Engagement and Support - Microsoft is enhancing customer support through dedicated success teams and analytics tools to measure ROI and usage of Copilot [36][40] - The introduction of Copilot Analytics allows customers to conduct cohort analyses to evaluate the effectiveness of Copilot [40] Governance and Compliance - Agent governance is a significant focus, with Microsoft aiming to provide customers with control over agent deployment and compliance [40][45] - The introduction of Agent 365 is expected to help manage agent sprawl and ensure compliance across various applications [45] Competitive Landscape - Microsoft acknowledges competition from OpenAI and Google but emphasizes its unique capabilities, such as Work IQ, which leverages existing user data to enhance productivity [76][81] - The company is committed to a multi-model approach, allowing users to choose between different AI models based on their needs [84][70] Compute Capacity Challenges - Microsoft is facing compute capacity constraints due to high demand from both first-party applications and third-party commitments [94][100] - The company is actively working on optimizing resource allocation and managing load across different regions and times [100][103] Future Outlook - The integration of AI and digital agents is expected to evolve, with predictions of more agents than humans in the workforce by 2026 [64][85] - Microsoft is focused on enhancing user experiences through improved AI models and workflows, aiming to maintain its competitive edge in the market [49][84] Additional Important Insights - The importance of security and compliance in the adoption of AI tools is highlighted, with a focus on data governance and policy management [18][81] - The potential for AI to transform traditional workflows and enhance productivity is a recurring theme throughout the discussion [56][64]

Summary of Microsoft Corp. (MSFT) Investor Meeting Company Overview - **Company**: Microsoft Corp. (MSFT) - **Current Price**: $487.12 - **12-Month Price Target**: $630.00 - **Upside Potential**: 29.3% [1] Key Topics Discussed 1. **Long-term AI Value Accrual**: - Investors are focused on where AI value will accrue in the long term, beyond short-term supply-demand dynamics. - Microsoft customers value flexibility across technologies and models, preferring larger, integrated solutions over many small components to reduce costs and integration challenges. - Microsoft aims to be model agnostic, as shown by partnerships with Anthropic and OpenAI, providing access to multiple models through its Foundry layer [2][15]. 2. **Emerging Killer Applications for AI**: - Significant productivity improvements are seen in coding and customer support applications. - The healthcare sector has shown strong adoption of Microsoft AI, with over 70% of providers utilizing AI for analytics, exemplified by the partnership with Epic [16]. 3. **ROI Breakthroughs**: - Large Language Models (LLMs) are primarily consumer-focused but can unlock greater ROI when integrated with enterprise applications. - Aiming for higher accuracy in AI tasks (from 80% to 90-95%) is crucial for mainstream adoption, requiring improved model capabilities and data integration [17]. 4. **AI Halo Effect on Azure and M365**: - Increased adoption of AI workloads on Azure is positively impacting other Microsoft products like Microsoft Fabric and Power BI. - Enterprises are recognizing the benefits of M365 Copilot, although implementation requires a learning curve [18]. 5. **Next Generation Data Center**: - Microsoft is developing a distributed network of AI data centers designed for high compute and energy density, capable of handling massive training workloads with lower latency [20][22]. 6. **Capacity Building for Growth**: - Microsoft is strategically increasing capacity while managing supply-demand imbalances, focusing on land, power, and GPU infrastructure. - Future investments in AI capacity are expected to enhance revenue from first-party applications, not just Azure [23]. Financial Projections - **Market Cap**: $3.6 trillion - **Revenue Forecasts**: - FY25: $281.72 billion - FY26E: $326.91 billion - FY27E: $376.69 billion - FY28E: $432.40 billion [3][11] - **EBITDA Forecasts**: - FY25: $162.68 billion - FY26E: $203.84 billion - FY27E: $238.14 billion - FY28E: $274.06 billion [3][11] - **EPS Forecasts**: - FY25: $13.64 - FY26E: $16.05 - FY27E: $19.53 - FY28E: $23.05 [3][11] Investment Thesis - Microsoft is positioned to capitalize on long-term trends such as generative AI, public cloud consumption, and digital transformation. - The company is expected to double its earnings per share from FY24 to FY28, with a projected cloud business run-rate of ~$250 billion by FY27, representing a 22% CAGR [24][25]. - Microsoft’s diverse offerings and strong market presence provide a competitive advantage in the evolving tech landscape [27]. Risks - Key risks include slower public cloud adoption, overall IT spending slowdown, and competitive pressures [30]. This summary encapsulates the critical insights from the investor meeting regarding Microsoft's strategic direction, financial outlook, and market positioning in the context of AI and cloud services.

Core Insights - Microsoft reported a total revenue of $77.7 billion for Q1 of FY2026, representing an 18% year-over-year growth, surpassing both market and internal expectations of 15% growth [1] - The GAAP net profit for the same quarter increased by 13% to $27.7 billion, aligning with expectations, driven by strong demand for AI products including Azure, M365, Windows, and search [1] - The company is optimistic about Microsoft's deep synergistic effects in the AI technology revolution, leading to an upward revision of revenue forecasts for FY2026 and FY2027 by 2.7% and 3.2% to $329.1 billion and $367.9 billion, respectively [1] - Net profit forecasts for FY2026 and FY2027 were also raised by 8.1% and 3.5% to $127.5 billion and $145.9 billion, respectively [1] - The rating remains "outperform" with a target price increase of 4.6% to $586 [1]

Core Viewpoint - Morgan Stanley believes that concerns about Microsoft being marginalized in the AI wave are unnecessary, upgrading Microsoft to "preferred" status with a target price of $625, indicating a 23% upside from the current price [2][3]. Group 1: Microsoft's Strategic Positioning - Microsoft is prioritizing its resources to serve enterprise clients with lower customer concentration, higher profit margins, and longer lifetime value (LTV) [5][9]. - The recent non-binding memorandum of understanding (MOU) with OpenAI signifies the evolution of their partnership, while Microsoft’s growth drivers extend beyond OpenAI, including strong growth in Azure cloud services and a solid ecosystem in enterprise productivity applications [5][10]. Group 2: AI Infrastructure and Competition - OpenAI has formed unprecedented partnerships with major tech companies, raising questions about Microsoft's competitive position in the GenAI field [3][6]. - Morgan Stanley's analysis suggests that Microsoft's decision to allocate some of OpenAI's computing needs to other suppliers reflects a strategic choice to maximize profits in a resource-constrained environment [6][9]. Group 3: Azure Growth and AI Business - Microsoft’s Azure AI business is projected to reach $10.4 billion in revenue by FY2025 and exceed $20 billion by FY2029, driven by ongoing investments and the enterprise cloud adoption trend [10][11]. - The diversification of AI-related business growth is evident, with Microsoft securing more AI cloud contracts outside of OpenAI, indicating a trend towards a more distributed revenue structure [11]. Group 4: Enterprise Applications and Productivity Ecosystem - Microsoft’s productivity applications (M365, Copilot, etc.) and its "digital office + knowledge worker" ecosystem are crucial for maintaining high customer stickiness against emerging AI challenges [13][15]. - Recent surveys show that 33% of enterprise customers have upgraded their O365 subscriptions to the higher-tier E5 version, with over half planning further upgrades, indicating strong demand for Microsoft’s productivity solutions [13].

Core Insights - OpenAI has formed unprecedented partnerships with major tech companies like Nvidia and Oracle, raising questions about Microsoft's future dominance in the GenAI space [1] - Morgan Stanley's report suggests that concerns about Microsoft being marginalized are unfounded, upgrading Microsoft's stock to "preferred" with a target price of $625, indicating a 23% upside from the current price [1][4] Group 1: Microsoft's Strategic Positioning - Microsoft's selective "letting go" of certain high-value contracts is seen as a sign of strategic maturity and confidence, prioritizing lower concentration, higher-margin enterprise customers in a resource-constrained environment [4][5] - The new non-binding Memorandum of Understanding (MOU) between Microsoft and OpenAI indicates that their collaboration is evolving, with Microsoft likely prioritizing long-term access to OpenAI's intellectual property [6][4] Group 2: Azure and AI Growth Potential - Microsoft's Azure AI business is projected to reach $10.4 billion in revenue by FY2025 and exceed $20 billion by FY2029, with a conservative estimate suggesting significant revenue potential even at a 30% gross margin scenario [9] - The diversification of AI-related business growth is evident, with Microsoft securing more AI cloud contracts outside of OpenAI, indicating a trend towards a more distributed revenue structure [11] Group 3: Enterprise Applications and Long-term Barriers - Microsoft's productivity applications (M365, Copilot) and its "digital workplace + knowledge worker" ecosystem are crucial for maintaining high customer retention against emerging AI competitors [14] - A survey indicates that 33% of enterprise customers have upgraded to the higher-tier E5 version of O365, with over half planning further upgrades, showcasing strong customer commitment to Microsoft's ecosystem [14]

Core Insights - Microsoft Corporation (NASDAQ: MSFT) is recognized as one of the 15 stocks predicted by ChatGPT to potentially generate significant wealth over the next five years [1] - The European Commission (EC) has accepted Microsoft's proposed commitments to address competition concerns regarding the integration of Teams with its M365 and Office 365 suites [2] Group 1: Commitments and Compliance - The commitments made by Microsoft will be legally binding under EU antitrust rules and aim to address concerns about the bundling of Teams with popular applications like Word, Excel, Outlook, and PowerPoint [2][3] - Microsoft has agreed to provide versions of its suites without Teams at a reduced price and allow customers with long-term licenses to switch to these Teams-free suites [3] - The company will also ensure interoperability between its products and competing communication tools, as well as allow customers to transfer their data out of Teams to other platforms [4]

Investment Rating - The report does not explicitly provide an investment rating for the industry or specific companies Core Themes - The conference will focus on the pervasive effects of AI across various sectors, including infrastructure, software business models, media, and consumption patterns, with insights on product strategy and financial implications for growth and margins [2][11] - There is an expectation of strong demand for AI infrastructure, particularly from hyperscalers and tier 2 providers, despite concerns about the sustainability of AI investments [3][18] - The software sector is debating whether AI will drive growth for existing players or disrupt traditional business models, with a focus on management's AI strategies [4][21] - Edge computing is anticipated to benefit from AI implementation, with expectations of improved PC growth and the emergence of mini-AI servers [5][25] - The online advertising landscape is evolving with AI, impacting search monetization and the effectiveness of advertising models [6][32] Summary by Sections AI Proliferation - AI is expected to dominate discussions, with companies sharing insights on their positioning relative to AI trends and its implications for growth and margins [2][11] - Key companies to watch include MDB, NOW, ZS, CRWD, and others that are leveraging AI for competitive advantages [2] Hyperscalers and AI Infrastructure - Despite concerns about the return on invested capital (ROIC) for AI investments, the fundamentals for AI remain strong, with data center investments expanding beyond hyperscalers [3][18] - Companies like AMD and MRVL are expected to discuss opportunities in sovereign AI and tier 2 cloud markets [18] Software Sector Dynamics - The software industry is assessing whether AI will enhance growth or disrupt existing business models, with a focus on how companies articulate their AI strategies [4][21] - Companies like MSFT are positioned to benefit from AI across multiple layers, including infrastructure and SaaS products [19] Edge Computing and PC Growth - Current PC growth is tempered by macro pressures, but AI applications are expected to drive wider acceptance and growth in the future [5][25] - AI PC shipments are projected to grow significantly, reaching 267 million units by 2029 [25] Online Advertising Trends - The online advertising environment is healthy, particularly for platforms leveraging AI for engagement and targeting [6][32] - Insights on the future of search monetization and how publishers are adapting to lower traffic levels will be key discussion points [6][32] Semiconductor and Equipment Insights - The semiconductor equipment sector is focused on growth in 2026 and the impact of China spending, with companies like KLAC and LRCX highlighted as top picks [33] - The analog semiconductor market is expected to recover, driven by demand in industrial and automotive sectors [31][33]

Core Perspective - The departure of GitHub's CEO marks a significant organizational shift as the platform integrates into Microsoft's newly formed CoreAI team, indicating a strategic repositioning in response to intensified competition in AI programming tools [1][2]. Company Integration and Strategy - GitHub will no longer operate solely as a "developer community business unit" but will closely align with Microsoft's AI capabilities and development toolchain, enhancing collaboration with products like VS Code, Azure, and M365 [1]. - The integration aims to unify model and inference infrastructure, accelerating the transition of Copilot from an "IDE assistant" to a "repository-native agent," streamlining the entire workflow from issue tracking to deployment [2]. Competitive Landscape - GitHub, an early adopter of AI in software development, faces increasing competition from companies like Google, Anthropic, and OpenAI, which have launched competing products that enhance coding efficiency and automation [2]. - The competition has evolved from merely speeding up code writing to embedding agent capabilities within repositories and pipelines, emphasizing the need for systems to autonomously understand context and manage pull requests [2]. Business and Ecosystem Dynamics - Microsoft's acquisition of GitHub for $7.5 billion in 2018 positioned GitHub as a key player in AI Copilot's development, which is seen as a crucial revenue growth driver [3]. - The integration into CoreAI may raise concerns regarding GitHub's independence, product agility, and pricing strategies, necessitating a balance between platform efficiency and developer culture [3]. Developer Impact - Developers can expect accelerated implementation of native agent capabilities, including enhanced automation for triage, bulk fixes, and testing generation, along with deeper integration with security and compliance modules [3]. - The evolving role of software developers is highlighted, as the industry shifts towards greater automation, making the ability to enable systems to operate independently a competitive advantage [3].