Microsoft Reports Earnings Beat Amid Soaring Azure Growth, But Issues Slower Guidance

Microsoft's latest quarterly report has outperformed expectations with a notable growth in revenue, driven largely by its Azure cloud infrastructure business. However, the company has indicated a forecast for slower growth in the upcoming quarter, resulting in a 4% decline in shares after trading hours. 

Performance Overview 

According to a report released on Wednesday, Microsoft reported earnings per share of $3.30, surpassing the expected $3.10. Notably, the company's revenue reached $65.59 billion, exceeding the anticipated $64.51 billion. This represents a year-over-year revenue growth of 16% for the quarter ending on September 30, with net income rising to $24.67 billion from $22.29 billion in the same quarter last year.

Outlook for the Next Quarter

Despite the impressive performance, Microsoft has issued guidance for fiscal second-quarter revenue in the range of $68.1 billion to $69.1 billion. This indicates a potential growth of 10.6% at the middle of the range, falling short of the $69.83 billion anticipated by analysts surveyed by LSEG.

In August, Microsoft announced a revision in the reporting structure of its business segments to align with its management approach. Consequently, mobility and security services, as well as certain Windows revenues, have been integrated into the productivity and business processes unit, now encompassing Office software. Revenue from productivity and business processes for the quarter reached $28.32 billion, reflecting a 12% increase and surpassing the $27.90 billion consensus among analysts surveyed by StreetAccount. This figure is also 38% higher than the $20.45 billion midpoint of the forecast provided by management in July, attributed to the reporting changes.

Insights into Cloud Computing Consumption

The report offers a transparent view of Microsoft's Azure and other cloud services revenue growth, excluding mobility, security, and Power BI data analytics sales for the first time. Azure growth for the quarter was recorded at 33%, with 12 percentage points attributed to artificial intelligence services, surpassing the consensus of 32.8% from CNBC and 29.4% from StreetAccount.

Amy Hood, Microsoft's finance chief, emphasized that "demand continues to be higher than our available capacity," during a conference call with analysts. The full intelligent cloud segment, encompassing Azure, Windows Server, and enterprise services, generated $24.09 billion in revenue, marking a 20% increase and slightly exceeding the $24.04 billion consensus reached by StreetAccount.

Performance in the Personal Computing Segment

The reporting changes have resulted in a reduced size of Microsoft's "more personal computing" segment. In the fiscal first quarter, this segment contributed $13.18 billion in revenue, reflecting approximately a 17% increase and surpassing the $12.56 billion consensus from StreetAccount. Despite a 2% growth in sales of devices and Windows operating system licenses to device makers, industry researcher Gartner estimated a 1.3% decline in quarterly PC shipments.

Continued Focus on Artificial Intelligence Investments

Microsoft's investments in artificial intelligence remain a focal point for investors. The company is extending its collaboration with BlackRock on an artificial intelligence infrastructure investment fund, with the aim of raising $30 billion in initial capital. Additionally, Microsoft continues to be the principal investor in OpenAI, the creator of ChatGPT, which was recently valued at $157 billion in a financing round.

As of September 30, Microsoft had accumulated over $108 billion in uncommenced finance leases, a factor that UBS analysts suggest might involve third-party cloud spending to meet the increasing demand for artificial intelligence.

Investment and Expenditure Trends

Moreover, Microsoft has significantly increased its spending on property and equipment, with a year-over-year growth of 50% in the fiscal first quarter, amounting to $14.92 billion. This figure exceeds the $14.58 billion consensus among analysts polled by Capital IQ. Despite these expenditures, Microsoft's stock has experienced a commendable increase of approximately 15% year-to-date, outperforming the Nasdaq's gain of around 24% during the same period.