This is the first full quarterly financial report since the launch of Copilot's generative AI assistant. It not only increased Microsoft's profit by 20% year over year and rose slightly from month to month, but also accelerated Azure cloud revenue growth by 31%, and contributed to a 7 percentage point increase in cloud revenue, all of which were appreciated by Wall Street. CEO Nadella said he has been incorporating partner OpenAI's artificial intelligence technology into Microsoft's entire product line.
After the US stock market on Thursday, April 25, tech giants led the popular circuit by accurately betting on generative artificial intelligence$Microsoft (MSFT.US)$The financial report for the third fiscal quarter of fiscal year 2024 (that is, the first quarter of the 2024 natural year) has been released, which will cover the first full quarter sales of the Microsoft 365 Copilot Generative Artificial Intelligence Assistant since it was launched for commercial customers in November last year.
AI-driven growth caused Microsoft's key financial indicators and businesses to fully exceed expectations for the quarter. Among them, overall Microsoft cloud revenue increased 23% year over year to US$35.1 billion, smart cloud revenue increased 21% to US$26.7 billion, and Azure revenue accelerated quarter by quarter, causing the stock price to rise more than 4% after the market.
Microsoft, a component of the Dow, closed down 2.5% on Thursday, stopping a three-day streak of gains and breaking away from a one-week high. Its market capitalization fell below $3 trillion, but it still surpassed Apple as the company with the highest market capitalization in the US stock market, mainly due to market expectations that AI-driven cloud revenue will continue to grow strongly.
Since this year, Microsoft's stock price has risen 6%, which is basically the same as the increase in the S&P market during the year, and has risen 35% over the past 12 months. The analysts' consensus rating is “Strong Buy”. A total of 32 people rated “buy”, 1 rated “hold”, and only 1 suggested “sell.” The average target price on Wall Street was 477.41 US dollars, indicating that there is still room for potential growth of nearly 17%.
AI helped Microsoft's Q1 performance comprehensively exceed expectations. Profit increased 20% year over year and rose slightly from month to month
According to financial reports, Microsoft's total revenue for the first quarter of the 2024 calendar year was 61.86 billion US dollars, higher than market expectations of 60.87 billion US dollars, which is equivalent to a 17% year-on-year increase, exceeding the 14.5% increase in the company's previous official guidelines.
Adjusted EPS per share was $2.94, higher than market expectations of $2.82, and increased 20% from $2.45 in the same period last year. Net profit was US$21.94 billion, up about 20% from US$18.3 billion in the same period last year. Operating profit increased 23% to US$27.6 billion.
Compared with the fourth quarter of last year, Microsoft's revenue declined month-on-month. At that time, it had increased 17.6% to cover 62 billion US dollars, the best quarterly year-on-year increase in the past two years since 2022, and recorded a record high for the fifth consecutive quarter driven by the AI wave. Profits rose slightly month-on-month.
Previously, the market generally believed that Microsoft's revenue side would continue to be driven by the continued growth of the cloud service Azure, aided by AI demand. The profit side, on the other hand, is being boosted by steady revenue growth and improved operating leverage through cost control measures. The continued growth of the Microsoft 365 product suite is also likely to drive its monetization metric: an increase in average revenue per user.
AI accelerated the growth of Azure cloud revenue by 31%, and the contribution to the increase in cloud revenue increased by 7 percentage points
By business, the revenue of the Intelligent Cloud Business Unit (Intelligent Cloud), which includes Azure public cloud, Windows servers, voice recognition software Nuance, and GitHub, increased 21% year-on-year to US$26.7 billion in the first quarter, exceeding market expectations of US$26.25 billion, higher than the company's guidance by about 18%, and higher than the 20.4% growth rate in the previous quarter.
Among them, revenue from Azure and other cloud services increased by 31%, higher than market expectations of 28.6%, as well as a growth rate of 29% in the third quarter of last year and a growth rate of 30% in the fourth quarter of last year, indicating that AI is indeed driving the accelerated growth of cloud revenue.
It is worth noting that artificial intelligence contributed 7 percentage points to Azure revenue this time, higher than the 6 percentage point increase in the fourth quarter of last year and the 3 percentage point increase in the third quarter of last year. Wall Street analysts have been expecting a higher revenue contribution from AI.
Microsoft Executive Vice President and Chief Financial Officer Amy Hood said in a statement that the strong execution of the sales team and partners drove Microsoft Cloud (Microsoft Cloud) revenue to increase 23% year over year to US$35.1 billion, higher than market expectations of US$33.93 billion, and increased 24% to US$33.7 billion in the previous quarter.
According to some analysts, Microsoft's cloud revenue increased dramatically in the first quarter, surpassing Amazon AWS and Alphabet's Google Cloud.
Revenue from other lines of business also increased by double digits, with Office commercial revenue including Copilot's AI assistant rising 15%
Microsoft's Productivity and Business-Processes division (Productivity and Business-Processes) quarterly revenue, which includes Office software, increased 12% year over year to US$19.6 billion, higher than the forecast of US$19.54 billion, and increased 13% to US$19.25 billion in the previous quarter.
Among them, revenue from Microsoft 365 Copilot artificial intelligence tools is included in the Office commercial product line. Office 365 commercial revenue increased 15% during the quarter, resulting in a 13% increase in revenue from Office commercial products and cloud services (12% increase at a fixed exchange rate).
In addition, more personal computing business units (More Personal Computing) include Windows operating systems, Surface hardware, Xbox game consoles, and the newly acquired video game company Activision Blizzard. Quarterly revenue increased 17% year over year to US$15.6 billion, higher than market expectations of US$15.07 billion, but lower than the increase of about 19% in the previous quarter to US$16.89 billion.
Among them, Windows revenue increased 11%, including an 11% increase in Windows OEM revenue, and a 13% increase in Windows commercial products and cloud services revenue (12% increase at a fixed exchange rate). Device revenue fell 17% year over year; Xbox content and service revenue increased 62%; and search and news ad revenue regardless of traffic acquisition costs increased 12%.
Why is it important?
Microsoft's earnings report attracted attention. In addition to its heavy position in the tech world due to its huge size, it also made investors pay attention to whether Microsoft and similar companies' huge AI investments have shown signs of continued returns due to its early leading position in the field of artificial intelligence.
Given that the Microsoft 365 Copilot AI chatbot, which pays an additional $30 per month per user, has been in operation for at least one full quarter, Microsoft's current earnings report will be a key barometer of AI's potential to monetize and drive growth:
“Microsoft has invested $13 billion in OpenAI, the parent company behind the most popular generative artificial intelligence ChatGPT, to become the leading standard-bearer of the AI circuit. Its performance will not only determine the overall performance of the software industry this earnings season, but also set the tone for this year's artificial intelligence adoption and development expectations.”
However, after Wednesday's market, Meta's earnings report, one of the AI leaders, was “unfavorable,” which has already reignited investors' fears about technology stocks. Wall Street News has mentioned that the sharp drop in Meta raised questions about the profitability of AI and concerns about the tech stock sector as a whole.
During the earnings call, analysts will pay close attention to the latest developments in the Azure cloud sector, in particular the customer interaction rate, subscription size, use case prospects for the launch of the CoPilot generative AI tool among consumer and enterprise customers in recent months, as well as performance guidance for the next few quarters, in order to learn about Microsoft's prospects for monetizing artificial intelligence and learn more about the next stage of AI development.
Investors will also pay attention to the cost pressure brought about by the large investment of tens of billions of dollars in AI. In order to develop AI services, Meta raised its 2024 capital expenditure forecast sharply yesterday and predicted that spending will continue to grow in the next few years. As a result, the market paid attention to Microsoft's comments. Previously, Microsoft had called for a sharp quarterly increase in capital expenditure to meet the demand for AI infrastructure.
What do you think of Wall Street?
The increase in demand for artificial intelligence has made Wall Street optimistic about Microsoft. Mainstream investment banks continue to raise their target price expectations before financial reports. The revenue growth rate of the Azure platform and other cloud services may have stabilized at around 30% for several consecutive quarters, but there are also concerns that Microsoft's revenue growth will slow down for the rest of the year.
Among bullish analysts, Wells Fargo called Microsoft “the best way to get in and invest in artificial intelligence.” Piper Sandler called Microsoft an “artificial intelligence superstar” and believes it is “in the early stages of monetizing AI's first-mover advantage.” Goldman Sachs also claims that Microsoft has “a unique position to expand generative AI revenue without structural changes to profit conditions.”
Daniel Ives, a well-known technology analyst at brokerage firm Wedbush, optimistically reiterated that generative AI adoption and CoPilot activities are doubly accelerating, which will push Microsoft to reach more Azure cloud deals and push the company to achieve “full growth”:
“Over the next 6 to 12 months, AI use cases are likely to explode across the enterprise sector. We see this as Microsoft's 'iPhone Moment', and we are confident that artificial intelligence will change Microsoft's cloud growth trajectory over the next few years.”
Recent AI Advances and Regulatory Risks
Microsoft unveiled the PHI-3-mini, a mini artificial intelligence model for small businesses this week. Broker Guggenheim has warned that compared with its peers, Microsoft has the highest risk exposure for small and medium-sized enterprises and consumers, and these users have shown signs of weak demand.
Microsoft also announced on Tuesday that it has signed a five-year agreement worth 1.1 billion US dollars with Coca Cola to use the software giant's Azure cloud services and artificial intelligence technology to accelerate the AI transformation of Coca Cola's entire system, and also help enhance Microsoft's artificial intelligence ambitions.
Some analysts pointed out that Microsoft has always chosen to expand the field of artificial intelligence through strategic partnerships and investments rather than direct acquisitions, partly to avoid the regulatory hurdles it encountered when acquiring Activision Blizzard.
Recently, Microsoft, which is dedicated to advancing artificial intelligence and cloud infrastructure around the world, invested in other AI startups such as Figure AI, Mistral AI, and Vengo AI, and announced plans to invest 2.9 billion US dollars in artificial intelligence and cloud infrastructure in Japan. Previously, it promised to invest 3.2 billion US dollars in the UK, 3.5 billion US dollars in Germany, and 2.1 billion US dollars in Spain.
Microsoft also invested billions of dollars in artificial intelligence startup Anthropic, invested 1.5 billion US dollars in UAE artificial intelligence company G42, and hired Mustafa Suleyman, co-founder of DeepMind AI and Inflection AI, as CEO of Microsoft's AI division in March of this year. Other key Inflection AI executives and several employees joined Microsoft.
However, whether investing in AI startups is an act of acquisition is causing big tech giants such as Microsoft to face regulatory scrutiny. OpenAI is Microsoft's biggest investment in artificial intelligence. Last week, the EU was prevented from starting an antitrust investigation into the relationship between the two, while the UK Competition and Markets Authority, the US Department of Justice, and the Federal Trade Commission are still considering whether to launch an investigation.
Editor/Somer