Microsoft reported a 16% rise in revenue, ignoring currency impacts, to $64.7bn. Growth was seen across divisions with Intelligent Cloud the standout at 20%. Within Cloud, Azure growth of 30% was a touch lower than the 31% expected. Operating income rose 16% to $27.9bn ($27.5bn expected), driven by revenue growth.
Free cash flow rose 18% to $23.3bn, despite a record $13.9bn in cash spent on capital expenditure (capex). Cash and short-term investments totalled $75.5bn and there was net cash, including lease liabilities, of $8.4bn.
For the coming quarter, Azure revenue is expected to grow 28-29% with capex increasing quarter-on-quarter.
The shares fell 2.0% in pre-market trading.
Our view
This was a good set of results from Microsoft; don't let anyone tell you otherwise. The slight softness in trading was down to a small miss from the Cloud division, specifically Azure, and a slightly weaker outlook. But we're splitting hairs really, and it's hard to be too critical when that growth from Azure is expected to be 28-29% next quarter.
Microsoft's future is now far more about cloud computing and Artificial Intelligence (AI) than it is Excel and Word. AI services contributed a big chunk of Azure's growth last quarter, 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 record 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, daily users doubled over the last quarter alone.
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 declines 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 benefactors of the coming AI transition. But as we've seen across the sector, markets can get ahead of themselves. When that happens, nothing short of perfection is tolerated. It feels like that's where we're sitting right now, increasing the chances of volatility.
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.
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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