First-quarter revenue rose 19% when ignoring currency moves, to $92.3bn ($90.7bn expected). Growth was led by Azure, up 48%.
Operating profit was $45.9bn ($44.1bn expected), up 22%, driven by strong revenue growth.
Free cash flow fell 27% to $18.6bn, as cash capex more than doubled to $39.4bn. The company returned $10.2bn in cash to shareholders.
Revenue in the coming quarter is guided at $96.0-97.1bn ($95.8bn expected). Azure is expected to grow 49-50% ignoring currency moves, and capex to be over $50bn.
The shares were up 3.6% in pre-market trading.
Our view
Microsoft just showed what it looks like when AI investment starts paying off. Azure accelerated again, Office growth picked up, and margins held close to 50%, all despite delays to some of the computing capacity it had been counting on. That's a powerful combination, and it continues to chip away at the two fears that weighed on the shares earlier this year.
Azure remains the key engine of the investment case. Demand still exceeds supply, but this quarter's beat wasn't driven by new capacity. Instead, engineering teams squeezed more out of the existing fleet, freeing up room to serve more customers. Guidance points to growth of around 50% in the coming quarter, and as delayed capacity arrives in the second half, there's scope for more.
Foundry, Microsoft's platform for building AI apps and agents, is quietly becoming an important growth engine, with revenue more than tripling. It lets customers pick and switch between models, including OpenAI's, open-source options and Microsoft's own. If different models suit different tasks, Microsoft's advantage may lie less in owning the single best model and more in connecting all of them to Azure, enterprise data and software.
The software side is also gaining momentum. Copilot is now the biggest driver of revenue per user in Office, and daily users rose by around half over the quarter. Microsoft also guided for Office growth to keep accelerating through the year. It didn't update its paid seat count, and there was some weakness in older Office packages, but the direction of travel is encouraging. Usage-based pricing adds another lever, though outside of coding, it'll take longer to scale.
The trade-off remains investment. Capex came in lower than expected this quarter, but that's down to timing rather than a change of plan. Spending is set to step up again in the second half, which will keep pressure on free cash flow. That said, Microsoft still expects to remain free cash flow positive this year, and the returns on its AI investment are becoming increasingly visible.
All in, Microsoft remains a best-in-class operator and one of our preferred names in tech and AI. Accelerating growth across both cloud and software, alongside resilient margins, strengthens the investment case, and we think the valuation still doesn't fully reflect that.
The key near-term risk is that Azure growth leans on Microsoft continuing to achieve efficiency gains, with new capacity timing a bit lumpy. Any further hold-ups, or a slowdown in demand for AI, could see growth fall short of the market's rising expectations.
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 that 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 that 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.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.