Microsoft Corp. is set to release its earnings report after Tuesday’s closing bell, and all eyes are on the role of artificial intelligence (AI) in the company’s success.
As an engine that drives Microsoft’s Azure cloud-computing business, AI is expected to have contributed to a 27% growth in the latest quarter, based on constant-currency projections. Analysts anticipate similar growth for the current quarter.
“While macro continues to linger, we have broadly heard of stabilization and in some cases acceleration in cloud consumption,” said Jefferies analyst Brent Thill, highlighting positive trends in the industry.
In addition to Azure, investors will also be keen on understanding the impact of AI on Microsoft’s software business. The company has invested in OpenAI and has recently integrated AI features into its software products, such as the Copilot launch for Microsoft 365 enterprise customers.
According to Evercore ISI’s Kirk Materne, “the interest level in Copilot is extremely high,” and this will undoubtedly affect Microsoft’s financials.
Key Numbers to Watch
Here are the key figures to anticipate in the fiscal second-quarter report:
Earnings: Analysts expect adjusted earnings per share to reach $2.77, up from $2.32 in the previous year.
Revenue: The consensus among analysts is that revenue will reach $61.1 billion, a rise from $52.7 billion during the same period last year.
Within the productivity and business-processes segment, which includes Office, revenue is projected to grow by 10% to $18.8 billion.
Analysts estimate Intelligent Cloud revenue, which encompasses Azure, will increase by 18% to $25.3 billion.
The More Personal Computing business, home to Xbox and Windows, is expected to show an 18% growth, reaching $16.8 billion.
Stock Performance
Microsoft shares have experienced a significant surge, with a 21% increase in the last three months and an impressive 69% rise over the past year. While the stock has shown positive movement following two of the company’s last five earnings reports, it gained 3.1% after the most recent release.
According to FactSet data, out of the 52 analysts covering Microsoft’s stock, 48 have given it a “buy” rating, while four have a “hold” rating. This indicates strong optimism surrounding Microsoft’s future prospects.
Analysts’ Perspectives
Guggenheim analyst John DiFucci believes that the company’s guidance of 16% constant-currency Office 365 commercial revenue growth is “achievable.” He points out that this guidance takes into account a significant decline in new annual recurring revenue. Despite not expecting a significant impact from M365 Copilot in the quarter, DiFucci expects the business to benefit from broad price increases implemented in March 2022, renewals of previous sweetener E3 deals at higher prices, and incentivized upgrades to the higher-priced E5 plan.
Truist Securities analyst Joel Fishbein is particularly interested in the company’s security commentary. He notes that historically, Microsoft discloses the size of its security business during this quarter. Given the recent reported breach, Fishbein expects extra attention to be given to this segment. He believes that based on the disclosed information, Microsoft is likely the largest cybersecurity vendor in the world.
Morgan Stanley’s Keith Weiss is focused on uncovering clues about the potential acceleration of Azure, Microsoft’s cloud computing platform. While there is optimism regarding the growth of AI contributions, Weiss explains how third-party data releases may not fully capture these contributions. Investors have been cautious due to this. Weiss highlights that discussions have mainly revolved around understanding generative AI’s impact on results and Microsoft’s ability to drive an acceleration in Azure growth in the latter half of FY24. He notes that management has indicated that constant currency Azure growth is expected to remain stable compared to Q2, taking into account easier year-over-year comparisons.
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