Microsoft earnings overshadowed by slow cloud growth; shares dip

Microsoftreported strong top and bottom-line figures for the quarter ending June 30, 2024. Despite this, the company’s shares declined by about 7% in after-hours trading due to slow growth in its cloud business.

The tech firm’s net profit in the quarter was $22 billion, up 10% as compared to the corresponding period of the last fiscal year. Its fourth-quarter revenue increased 15% to $64.7 billion from $56.2 billion in the year-ago period.

The software giant concluded FY24 with a revenue of $245.1 billion, representing a 16% year-over-year increase, and a net profit of $88.1 billion, up 22% year-on-year.

Microsoft is a key player in the cloud computing industry, competing with Amazon Web Services (AWS) and Google Cloud. In Q4, revenue growth from Azure and other cloud services was 29% compared with 31% in the previous quarter.

“In Azure, we expect Q1 revenue growth to be 28% to 29% in constant currency. Growth will continue to be driven by our consumption business, inclusive of AI, which is growing faster than total Azure,” said Amy Hood, executive vice president and chief financial officer of Microsoft, during the earnings call.

“We expect the consumption trends from Q4 to continue thru the first half of the year. This includes both AI demand impacted by capacity constraints and non-AI growth trends similar to June,” she added.

According to Hood, Azure growth in the quarter included 8 points from AI services.

In the second half of Microsoft’s fiscal year 2025, it expects Azure growth to accelerate as its capital investments are expected to create an increase in available AI capacity to serve more of the growing demand, Hood explained.

The CFO said that the company’s capital expenditures in the fourth quarter was $19 billion, with cloud and AI related spend representing nearly all of it. 

“Within that, roughly half is for infrastructure needs where we continue to build and lease datacenters that will support monetization over the next 15 years and beyond,” she noted.

“We will scale our infrastructure investments with FY25 capital expenditures expected to be higher than FY24,” she added.

Google parent Alphabet, which reported its second-quarter financial results for 2024 last week, also highlighted that quarterly CapEx would be roughly at or above $12 billion throughout the year to support its technical infrastructure, with the largest component being servers, followed by data centres.

Microsoft's cloud revenue for the quarter was $36.8 billion, up 21% year-over-year, and for the fiscal year 2024, the revenue surpassed $135 billion, marking a 23% increase.

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Business segments

The Redmond-headquartered firm broadly categorises its revenue under three segments—productivity and business processes, intelligent cloud, and more personal computing.

Microsoft's productivity and business processes clocked in $20.3 billion in revenue in the quarter, up 11% year-over-year. Revenue for intelligent cloud, which includes the Azure cloud computing platform, rose 19% to $28.5 billion in the June-ended quarter.

More Personal Computing—which includes revenue from Windows OEM, Devices, Xbox content and services, Search and news advertising, as well as Windows Commercial products and cloud services—was up 14% to $15.9 billion in the quarter.

Microsoft introduced its new category of Copilot+ PCs this quarter. “We are delighted by early reviews. And we are looking forward to the introduction of more Copilot+ PCs powered by all of our silicon and OEM partners in the coming months,” Microsoft Chairman and Chief Executive Officer Satya Nadella said.

Microsoft’s business and employment-oriented online service LinkedIn’s revenue increased 10% driven by better-than-expected performance across all businesses.

According to Nadella, 1.5 million pieces of content are shared on the platform every minute, and video has become the fastest-growing format on LinkedIn, with uploads increasing by 34% year-over-year.

Gaming continues to be a key focus area for Microsoft, with the company making significant advancements in recent years, including the introduction of next-generation consoles and cloud gaming.

Speaking about gaming, Nadella said, “We now have over 500 million monthly active users across platforms and devices. And our content pipeline has never been stronger.”

In Gaming, revenue grew 44%, with a 48-point net impact from the Activision acquisition, while Xbox content and services revenue rose 61%, with a 58-point impact from the acquisition, according to Hood.

On October 13, 2023, Microsoft completed the acquisition of Activision Blizzard, the developer of Call of Duty, marking its largest-ever and the gaming industry’s biggest deal.

Commenting on the outlook for the next fiscal, Hood said, “We continue to expect double-digit revenue and operating income growth.”