Microsoft reported second-quarter revenue of $81.3bn ($80.3bn expected), up 15% when ignoring currency moves. Growth was broad-based, including 38% in Azure.
Operating profit was $38.3bn, up 21%, driven by strong revenue growth and margin expansion.
Free cash flow fell 9% to $5.9bn, with net cash including lease liabilities at $31.9bn. Over the quarter, the company returned $12.7bn in cash to shareholders.
Revenue in the coming quarter is guided to land between $80.7–81.8bn, with Azure expected to grow at 37-38% when ignoring currency moves.
The shares were down 6.4% in pre-market trading.
Our view
In our eyes, Microsoft delivered another strong quarter. Shares came under pressure on the day, in part due to high expectations on Azure, and perhaps a concern that almost half of the order backlog comes from OpenAI, the first time this has been disclosed.
Still, for us, 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 don’t get a split anymore, but comments from management suggest all workloads are contributing.
Investment in new infrastructure is elevated but stable. It's a hefty weight, but Microsoft is such an efficient beast that it's still generating a bucket load of free cash flow despite investing a record amount of cash in growing the business. Management has been clear that it’s prioritising new compute capacity on internal use cases over adding to the cloud, something we think investors might have missed.
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.
Ironically, as a business investing to benefit from AI, Microsoft finds itself caught up in a wave of negative sentiment toward software names, with fears that a wave of new tools will be created at a whim using AI. We certainly don’t discount those risks, but we do feel that the stronger names in the sector are set to be winners, not losers.
We think 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 gain traction. If and when sentiment recovers, however, is hard to map, which could weigh on the stock in the near term.
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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