Microsoft reported third-quarter revenue of $70.1bn, up 15.0% when ignoring currency moves (10.6% expected). Growth was broad based, including 35% in Azure (31-32% expected).
Operating profit was $32.0bn ($30.3bn expected), up 19% in constant currency, driven by revenue growth.
Free cash flow fell 3% to $20.3bn ($17.5bn expected) with net cash excluding lease liabilities at $19.1bn. Over the quarter, the company returned $9.7bn in cash to shareholders.
The company issued fourth quarter revenue guidance of $73.7bn at the midpoint, with Azure expected to grow at 34-35%.
The shares were up 6.9% in pre-market trading.
Our view
Microsoft’s third-quarter results gave investors exactly what they were looking for. While it’s usually seen as one of the more stable big tech names, the stock has been under pressure along with the broader market. These numbers helped calm some nerves - cloud growth is picking up again with AI playing a bigger role, capex remains high but growth is easing, and products like Copilot are starting to deliver.
Microsoft's growth is now far more about cloud computing and Artificial Intelligence (AI) than it is Excel and Word – not to say the latter aren’t important. AI services contributed a big, and growing, chunk of Azure's growth in the last few quarters, and that's a trend we expect to continue. For now, demand is outstripping capacity, which is holding growth back a touch – but we're not overly concerned – it's a nice problem to have.
Investment in new infrastructure is elevated but stable, to service that demand. It's a hefty weight, but Microsoft is such an efficient beast that it's still managing to generate healthy levels of free cash. There are genuine concerns that AI isn't delivering the end products and services needed to support all the buildout.
The emergence of some impressive competition has also caught the market’s attention. But we think that misses the bigger picture. Megatrends like AI take time, rarely track in a perfect line, and bumps in the road are part of the journey.
Microsoft also benefits from being both an AI enabler and a direct user. Its Copilot tool, integrated into apps like Word, 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.
We think Microsoft has come under some unwarranted criticism of late, meaning the valuation has come down. This marks an attractive entry point for a business that has leadership positions across several markets, and a strong setup to leverage AI for future growth. Nothing is guaranteed and its resilient end markets could still come under pressure if economic conditions get materially worse.
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
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.