Microsoft reported better-than-expected fiscal second quarter earnings and revenue after Tuesday’s closing bell. The tech giant showed continued strength in its cloud computing and productivity software businesses.
Key Numbers
- Earnings per share: $2.32 vs $2.29 expected
- Revenue: $52.75 billion vs $52.94 billion expected
“Microsoft turned in a strong performance across all segments in what was a turbulent macro environment,” said Dan Ives, Wedbush Securities analyst. “The core enterprise cloud franchise is fueling growth and this success story is continuing to play out in 2024.”
Azure Cloud Growth Decelerates Slightly But Remains Strong
Microsoft’s Azure cloud computing platform remains its key growth driver even as growth rates have decelerated. Azure revenue grew 31% in constant currency, down from 35% growth in the previous quarter. However, Azure is continuing to gain market share in the highly competitive cloud market.
“Even with a slightly slowing growth rate, Azure is holding up better than its closest rivals AWS and Google Cloud,” said Maribel Lopez, principal analyst at Lopez Research. “Enterprise appetite for cloud is healthy as digital transformation continues full steam ahead.”
Office and LinkedIn Drive Productivity Segment
Microsoft’s productivity segment, which includes Office 365, Dynamics 365, and LinkedIn, produced $17.4 billion in revenue, up 7% year-over-year. Strong adoption of Microsoft 365 and decent growth for LinkedIn recruiting products contributed to the gains.
“We believe LinkedIn will be an integral part of Microsoft’s long-term growth story as one of the world’s essential professional networks,” said Dan Romanoff, Morningstar analyst.
PC Market Headwinds Impact Windows and Devices
The Windows and devices segments faced difficult year-over-year comparisons and weakening PC demand. Revenue for Windows OEM and Windows commercial products declined 39% and 16%, respectively. Surface revenue dropped 30%, reflecting inventory adjustments across the PC supply chain.
“Despite macro weakness impacting the PC market, Microsoft’s diversified portfolio has shown resilience,” said Anurag Rana, senior analyst at Bloomberg Intelligence. “Growth drivers like Azure and Office 365 are compensating for cyclical Windows weakness.”
Outlook and Guidance
Microsoft issued lighter than expected guidance for the fiscal third quarter. The company expects:
- Revenue between $50.5 billion and $51.5 billion, compared to analyst estimates around $52.9 billion
- Earnings per share between $2.32 and $2.37, just under consensus forecasts for $2.37
The guidance reflects “macroeconomic uncertainty and foreign exchange headwinds,” said Amy Hood, Microsoft CFO during the earnings call. Hood added that Microsoft is well positioned with “the stability of our commercial business and long-term growth opportunities.”
Microsoft Stock Reaction
Microsoft shares initially fell around 4% after issuing the light guidance but recovered most losses the following day.
“This is a high quality name investors want to own for the long haul,” said Dan Ives, Wedbush analyst. “Microsoft continues to fire on all cylinders from a growth perspective heading into 2024 despite some modest speed bumps.”
Here is a table summarizing Microsoft’s latest earnings results:
| Segment | Revenue (billions) | Year-over-Year Change |
|---|---|---|
| Productivity & Business | $17.4 | +7% |
| Intelligent Cloud | $21.5 | +18% |
| More Personal Computing | $14.2 | -19% |
| Total Revenue | $52.7 | +2% |
Outlook Going Forward
The latest earnings report balances short-term macro headwinds with Microsoft’s long runway for growth in digital transformation.
While cyclical weakness in the PC market and a stronger dollar may limit near term upside, demand looks healthy for Microsoft’s cloud, productivity, and business application offerings. Azure’s market leading position also continues gaining share.
Microsoft expects foreign exchange will remain a drag through at least the middle of 2024. However, cloud momentum should support earnings growth after currency effects subside.
Analysts widely see Microsoft shares as attractively valued given its dominant enterprise software position. The stock trades at around 25x forward earnings after the post-earnings dip, roughly in line with historical averages.
“Microsoft’s ability to drive double digit total revenue growth despite economic uncertainty is impressive,” said Keith Weiss, Morgan Stanley analyst. “We recommend buying on weakness as Azure adoption trends remain robust.”
In the long run, Microsoft looks well positioned to deliver around 15% total annual returns driven by earnings and dividend growth. The company’s fortress enterprise competitive moats provide resilience through economic cycles.
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