Microsoft’s earnings were better than feared but not without caveats
Shares of Microsoft (MSFT) jumped as much as 8% on Wednesday after the tech giant reported better- than-anticipated fiscal third-quarter results Tuesday. The Windows maker beat Wall Street’s expectations across the board, from revenue and earnings per share to cloud and productivity services revenue.
But Microsoft’s beats aren’t without their caveats. It’s not as though the company crushed analysts’ anticipated numbers. Rather, it’s best to frame Microsoft’s performance as better than feared. As for the tech giant’s all-important cloud business, that’s still contending with a slowdown in overall growth.
“Numbers definitely [came] in a little bit stronger than what people were worried about,” RBC Capital Markets analyst Rishi Jaluria told Yahoo Finance Live Tuesday. “Especially given all of the headlines around the softening IT environment, recessions, and obviously the banking crisis.”
Microsoft reported overall revenue of $52.9 billion in the quarter versus expectations of $51.1 billion. Its Productivity and Business processes unit brought $17.5 billion versus an anticipated $17.1 billion, while the Intelligent Cloud division, which includes Azure, saw revenue of $22.1 billion versus expectations of $21.9 billion.
Microsoft’s More Personal Computing division reported revenue of $13.3 billion, which was more than the $12.3 billion Wall Street expected.
But it’s important to look beyond those initial numbers. Let’s take More Personal Computing for example. Microsoft’s segment, which includes sales of Windows software to third-party PC makers, was down as much as 9% with Windows OEM revenue off 28%.
Microsoft’s bread and butter, its cloud business, still saw impressive growth with Azure and cloud services revenue growing 27%, but that’s off from 46% growth in Q3 2022. In fact, growth for that particular area has been slowing quarter-over-quarter for the past year, with Q2 revenue growth coming in at 31%.
“I think investors I was talking to were prepared for a miss on the Azure line, which is the most important line,” Jaluria said.
For Microsoft, though, there’s a bright spot despite the growth slowdown: Artificial intelligence. The company has been riding high on the AI wave since it began rolling out its Bing chatbot and Edge browser earlier this year. Since then, it’s started adding OpenAI-powered technology across its various commercial offerings ranging from Dynamics 365 and its security services to Microsoft 365. And that’s a powerful advantage.
“Microsoft, as you look at the roadmap, it is a scary roadmap,” Baird technology strategist Ted Mortonson told Yahoo Finance Live Wednesday. “It’s almost kind of like the technology Death Star if you will.”
When Microsoft's AI work starts to bear fruit, however, is an open guess. CEO Satya Nadella was emphatic in describing the potential impact of the technology during the company’s earnings call, but we still don’t have any inkling as to how much that will drive future revenue growth just yet.
By Daniel Howley, tech editor at Yahoo Finance. Follow him @DanielHowley
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