Microsoft reported first-quarter revenue of $77.7bn ($75.3bn expected), up 17% when ignoring currency moves. Growth was broad-based, including 39% in Azure (c.41% expected).
Operating profit was $38.0bn, up 22% in constant currency, driven by strong revenue growth and margin expansion.
Free cash flow rose 33% to $25.7bn, with net cash including lease liabilities at $41.5bn. Over the quarter, the company returned $10.7bn in cash to shareholders.
Revenue in the coming quarter is guided to land between $79.5–80.6bn, with Azure expected to grow at 37% when ignoring currency moves.
The shares fell 2.9% in pre-market trading.
Our view
Microsoft delivered another strong quarter, though the market response was muted because Azure growth came in slightly below very high expectations. Even so, 39% growth is exceptional, and the underlying message is positive: demand for AI is so strong that Microsoft can’t build capacity fast enough.
AI services are delivering a big, and growing, chunk of Azure's growth in the last few quarters, and that's a trend we expect to continue. We were also pleased to see ongoing growth in non AI related demand for Microsoft’s cloud offering, which is still a key part of the mix.
Investment in new infrastructure is elevated but stable. It's a hefty weight, but Microsoft is such an efficient beast that it generated an all-time high free cash flow despite investing a record amount of cash in growing the business. Management has been clear that it’s investing with specific revenue streams in mind, which should help calm some nerves.
Microsoft also benefits from being both an AI enabler and a direct user. Microsoft 365 subscriptions are still a core part of the business, and we’re starting to see the benefits to pricing from some of its latest tools. Copilot, for example, is being integrated into apps like Word and is showing promising growth, though questions remain about the timing and scale of its revenue contribution.
There are more growth drivers in the mix. The Personal Computing division is getting a lift from the Activision Blizzard acquisition, helping offset weaker hardware sales in a tough consumer environment. Meanwhile, subscription revenues from LinkedIn and Office remain a valuable and resilient stream.
Of course, with Microsoft's size and influence, regulation is always a risk. It’s still unclear how AI regulation will evolve or whether it will benefit or burden the biggest players. It’s a space to watch.
Like many in the AI race, there have rightly been questions about Microsoft’s level of spend, the medium-term impact on costs and margins, and whether increased revenue will come through fast enough. This was another quarter that helps to alleviate some, but not all, of those concerns.
All in, Microsoft is a best-in-class operator and remains one of our preferred names in the tech and AI space. We see scope for both near and long-term upside, as cloud capacity continues to come online and AI tools proliferate further. That said, we understand concerns around a bubble forming in the AI space and it’s certainly something to watch.
Environmental, social and governance risk
The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, Microsoft’s overall management of material ESG issues is strong.
Microsoft’s deep pockets mean it’s able to spend $20bn in the coming few years to help combat the threat of cybersecurity attacks. At the same time, the group already has relatively robust analytics and oversight structures in place to help reduce this risk. That said, Microsoft’s handling of data has come under scrutiny in the past, and its huge scale means this risk remains material.
Microsoft key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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