by Shares of Microsoft (MSFT) jumped as much as 8% on Wednesday after the tech giant reported better-than-expected third-quarter fiscal results on Tuesday. The Windows maker beat Wall Street’s expectations across the board, from revenue and earnings per share to productivity and cloud services revenue.
But Microsoft’s beats aren’t without caveats. It’s not like the company squashed the numbers analysts expected. Rather, it’s best to frame Microsoft’s performance as better than feared. As for the tech giant’s all-important cloud business, it’s still grappling with a slowdown in overall growth.
“Numbers for sure [came] in a bit stronger than people were worried about,” RBC Capital Markets analyst Rishi Jaluria told Yahoo Finance Live on Tuesday. “Especially given all the headlines about the weakening IT environment, recessions and obviously the banking crisis”.
Microsoft reported total revenue of $52.9 billion for the quarter versus expectations of $51.1 billion. Its Productivity and Business Process unit brought in $17.5 billion versus $17.1 billion expected, while its Intelligent Cloud division, which includes Azure, reported revenue of $22.1 billion versus $21.9 billion expected.
Microsoft’s More Personal Computing division reported revenue of $13.3 billion, which was more than the $12.3 billion expected by Wall Street.
But it’s important to look beyond those initial numbers. Take for example More Personal Computing. Microsoft’s segment, which includes sales of Windows software to third-party PC makers, declined 9% with Windows OEM revenue down 28%.
Microsoft’s bread and butter, its cloud business, still experienced impressive growth with Azure and cloud services revenue up 27%, but that’s a far cry from the 46% growth in Q3 2022. In fact, growth for that particular area it slowed quarter-over-quarter over the past year, with second-quarter revenue growth of 31%.
“I think the investors I was talking to were prepared to lose the Azure line, which is the most important line,” Jaluria said.
For Microsoft, however, there is one bright spot despite slowing growth: artificial intelligence. The company has been riding the AI wave since it began rolling out its Bing chatbot and Edge browser earlier this year. Since then, it has started adding OpenAI-based technology into its various commercial offerings ranging from Dynamics 365 and its security services to Microsoft 365. And that’s a big plus.
“Microsoft, when you look at the roadmap, it’s a scary roadmap,” Baird technology strategist Ted Mortonson told Yahoo Finance Live on Wednesday. “It’s almost a bit like Death Star technology, if you will.”
When Microsoft’s AI work will start to bear fruit, however, is open to speculation. CEO Satya Nadella was emphatic in describing the technology’s potential impact during the company’s earnings call, but we still have no idea how much that will drive future revenue growth.
From Daniel Howley, technical editor of Yahoo Finance. Follow him @DanielHowley
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