Microsoft reported a 16% rise in revenue over the first quarter, ignoring currency impacts, to $65.6bn. Growth was seen across all divisions, with Intelligent Cloud the standout at 21%. Within Cloud, Azure growth of 34% was a touch higher than expected, with a 12 percentage point contribution from AI. Operating profit rose 14% to $30.6bn ($29.2bn expected), driven by revenue growth.
Free cash flow fell 7% to $19.3bn, due to a record $14.9bn in cash spent on capital expenditures. Cash and short-term investments totalled $78.4bn and there was net cash, including lease liabilities, of $17.0bn.
Microsoft returned $9.0bn to shareholders in the form of dividends and share buybacks over the period.
For the coming quarter, Intelligent Cloud is expected to grow between 18-20% with Azure growing 31-32%, when ignoring currency impacts.
The shares were down 3.7% after-hours trading.
Our view
Microsoft has put the doubters to bed, for now at least, with a strong performance from the cloud division, specifically Azure. The downbeat stock reaction is likely due to guidance given on the call, with it looking like Azure growth is set to ease into the new quarter - but at 31-32%, we’d hardly call that a slowdown.
Microsoft's future is now far more about cloud computing and Artificial Intelligence (AI) than it is Excel and Word – not to say the latter aren’t important. AI services contributed a big, and growing, chunk of Azure's growth in the last two quarters, and that's a trend we expect to continue. For now, demand is outstripping capacity, which is holding growth back a touch – but we're not overly concerned – it's a nice problem to have.
Investment in new infrastructure is ramping up to service that demand. It's a hefty weight, but Microsoft is such an efficient beast that it's still managing to generate healthy levels of free cash. There are genuine concerns that AI isn't delivering the end products and services needed to support all the buildout, but we think that misses the bigger picture. Megatrends like AI take time, rarely track in a perfect line, and bumps in the road are part of the journey.
Aside from enabling other businesses to build AI products, Microsoft's own software stack can also be a major beneficiary. Copilot, an AI chatbot integrated into apps like Word, is a great example of a new tool showing impressive growth. But there are question marks around how and when it’ll drive meaningful additional revenue.
There are more strings to Microsoft's bow, too. The Personal Computing division is reaping the benefits of the acquisition of Call of Duty maker Activision Blizzard. This is offsetting softness in physical hardware sales, reflective of the challenging consumer environment. Then, of course, there's the stack of products we can't live without, with an increasingly valuable stream of subscription-based revenue from the likes of LinkedIn and Office.
When you have the size and reach of Microsoft, regulation is always a key risk. We don't know how the new AI world will be regulated or whether it'll hurt or hinder the largest kids on the block. For now, it's something to watch and be mindful of.
Ultimately, Microsoft is a top dog, reflected in a valuation above the long-term average. We continue to view its mix of infrastructure and software services as essential components and anticipated benefactors of the coming AI transition. Key risks lie around competition in the cloud space, question marks on the effectiveness of its copilot tools, and the valuation adds pressure to deliver.
Environmental, social and governance risk
The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, Microsoft’s overall management of material ESG issues is strong.
Microsoft’s deep pockets mean it’s able to spend $20bn in the coming few years to help combat the threat of cybersecurity attacks. At the same time, the group already has relatively robust analytics and oversight structures in place to help reduce this risk. That said, Microsoft’s handling of data has come under scrutiny in the past, and its huge scale means this risk remains material.
Microsoft key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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