Microsoft (MSFT) reported its fiscal fourth-quarter earnings, revealing both achievements and challenges in its financial performance. Despite beating Wall Street’s expectations on revenue and earnings per share (EPS), the company’s cloud segment fell short of analyst predictions, leading to a drop in its stock price in after-hours trading.
CEO Satya Nadella emphasized the company’s robust progress in AI during the earnings call, likening its importance to the shift toward cloud computing in previous years. Nadella shared impressive growth statistics, highlighting the widespread adoption of AI products like AzureAI and Copilot. With over 50,000 customers now using AzureAI, and a significant increase in average spending per customer, the AI sector is proving to be a pivotal growth area for Microsoft. The use of AzureAI as a service more than doubled from March to June, while the intelligent data platform saw a 20% quarter-over-quarter increase with over 14,000 customers preparing data for AI models.
Copilot, Microsoft’s AI assistant, has been particularly successful on GitHub, where its use surged 180% year-over-year, contributing to over 40% of GitHub’s growth. GitHub has now become a $2 billion business, reflecting the substantial impact of AI integration on its platform.
Microsoft reported revenue of $64.7 billion for the quarter, exceeding the forecast of $64.1 billion and the consensus estimate of $64.4 billion. The EPS also surpassed expectations, coming in at $2.95 compared to the anticipated $2.90. However, despite these positive figures, investors were disappointed by the performance of Microsoft’s cloud services.
The Intelligent Cloud segment, which includes Azure, generated $28.5 billion in revenue, falling short of the expected $28.7 billion. Although cloud revenue growth was 30% year-over-year, it marked a decline from the previous quarter’s 31% growth. This deceleration in cloud growth was a key factor in the stock’s after-hours decline.
The Office 365 commercial business also experienced a slowdown, with growth decreasing from 17% in the first quarter to 14% by June. Despite these challenges, the overall revenue from cloud services still represented a significant portion of Microsoft’s income, showcasing the critical role of cloud and AI in the company’s future.
Microsoft’s gaming revenue rose by 44%, benefiting from the Activision Blizzard acquisition. However, without the merger, gaming revenue would have declined year-over-year. The hardware unit underperformed, with devices revenue falling 11% and Xbox console hardware revenue dropping 42%.
The More Personal Computing segment, encompassing Windows operating systems, devices, and search advertising, generated $15.9 billion in revenue, up 14% year-over-year. This growth was supported by a stabilizing PC market, with sales of Windows licenses to device makers increasing by 4%.
Analysts remain cautiously optimistic about Microsoft’s future. While the current quarter’s performance had mixed results, the company’s investments in AI and cloud services are expected to drive long-term growth. Truist’s Joel Fishbein and CFRA’s Angelo Zino both maintain buy ratings on MSFT, with target prices reflecting significant potential for stock appreciation.
Microsoft’s guidance for the upcoming fiscal year suggests continued double-digit revenue and operating income growth, although margins may slightly compress due to higher AI spending. Investors will closely monitor the company’s progress in scaling its AI capabilities and its ability to capture a larger share of the cloud market.