Microsoft Q1 Earnings Exceed Expectations On Cloud Growth

Microsoft’s shares surged by as much as 6% in extended trading following the release of the company’s fiscal first-quarter results, which outperformed Wall Street predictions. A slowdown in the pace of operating expenses growth contributed to a substantial increase in profits.

Here’s a snapshot of how the tech giant fared in comparison to analysts’ expectations:

• Earnings per share: $2.99 vs. expected $2.65
• Revenue: $56.52 billion vs. expected $54.50 billion

During a conference call with analysts, Amy Hood, Microsoft’s Chief Financial Officer, provided guidance for the fiscal second quarter, forecasting revenue ranging from $60.4 billion to $61.4 billion, implying a 15% growth rate. This exceeded analyst expectations, which had predicted $60.9 billion in revenue.

The quarter saw Microsoft’s revenue increase by nearly 13% compared to the previous year, rising from $50.12 billion to $56.52 billion. Net income also saw a substantial boost, reaching $22.29 billion, a 27% increase from the $17.56 billion (or $2.35 per share) reported in the same quarter the previous year.

The Intelligent Cloud segment generated $24.26 billion in revenue, reflecting a 19% increase, surpassing analysts’ consensus of $23.49 billion. This segment includes major components like the Azure public cloud, SQL Server, Windows Server, Visual Studio, Nuance, GitHub, and enterprise services. Notably, revenue from Azure alone rose by 29% during the quarter, outperforming the 26% consensus from analysts. Although Microsoft does not disclose Azure’s revenue in dollars, the constant currency assessment showed a 28% increase, accelerating from the 27% growth reported in the fiscal fourth quarter.

Hood mentioned that Microsoft is expecting Azure growth to remain consistent in the second half of the 2024 fiscal year, forecasting it to be in the range of 26% to 27%, with an increasing contribution from artificial intelligence. While Microsoft continues to aid customers in leveraging the Microsoft Cloud, clients are exploring new generative AI tools in the cloud, with the Azure OpenAI Service now boasting 18,000 customers, up from 11,000 in July. A significant portion of Azure’s growth, around 3 percentage points in the quarter, was attributed to AI, surpassing the initial forecast of 2 points.

The Productivity and Business Processes unit reported $18.59 billion in revenue, marking a 13% increase, exceeding StreetAccount’s $18.19 billion consensus. This unit encompasses Microsoft 365 productivity app subscriptions, LinkedIn, and Dynamics enterprise software. The Teams communication app has garnered more than 320 million monthly active users, compared to 300 million six months ago.

The More Personal Computing segment, which includes Windows, Xbox, Bing, and Surface, contributed $13.67 billion in revenue, reflecting a 3% increase, surpassing the StreetAccount consensus of $12.85 billion. Microsoft reported a 4% growth in the sales of Windows operating-system licenses to device manufacturers, ending a five-quarter streak of year-over-year declines. The PC market appears to be stabilizing, with shipments down 9% in the third quarter, compared to a significant 30% decline in the first quarter.

Microsoft has continued to reduce its growth in research and development costs and sales and marketing expenses, with operating expenses rising by 1.3%, the slowest rate since 2016. For the fiscal second quarter, Microsoft foresees approximately 5% growth in this regard.

During the quarter, Microsoft introduced new cybersecurity services, announced new Surface PCs, and revealed plans to offer its Microsoft 365 Copilot AI add-on to enterprises starting from November 1.

Furthermore, Microsoft recently completed its $68.7 billion acquisition of video game publisher Activision Blizzard, although this acquisition isn’t incorporated into the fiscal first-quarter results. It is expected to impact earnings in the next quarter, which will likely be discussed when providing guidance.

Despite the after-hours stock movement, Microsoft’s shares have gained 38% year-to-date, surpassing the S&P 500 index’s growth of about 11% during the same period.