The narrow-moat Microsoft MSFT has always been a remarkable performer; after all, it has topped the revenue and profit expectations for the third quarter. As previously assuming a medium-term expansion and expected profits, given the stronger near-term growth, they have updated the fair value estimate to a $435 share price, up by $15 from the previous estimate of $420. As efforts are confirmed and points are scored from several angles, the best three jump out: cloud (AI& Azure), gaming, and bookings, which saw a surge from Azure deal customers and a wonderful bottom line despite certain pressure on the Activision deal. Artificial Intelligence (AI) continues to be the show’s star and has had a favorable impact of + 700 basis points on Azure’s revenue. Furthermore, the management gave an informational outlook for fiscal 2025 and a lower margin contraction of approximately 1.0%, which was in line with our estimate. Shares are skyrocketing, 4% after-hour, and within the 3-star area.
Azure AI powers growth
Results provide powerful support for the main thesis of expanding a hybrid cloud environment from Microsoft Azure, which has proved to be a good strategy as many clients managed to move to the cloud because they were not forced but identified Azure as the right tool for the particular stage of their business development. Our growth is based on impetus from the Azure Platform, Microsoft 365 E5 Migration, and traction from the Power Platform to attain longevity of the business. AI is also rapidly expanding into the office environment, which we believe will create another secular cadre.
In March, the top line figure grew by 17% year to year to 61.86 billion, compared to the midpoint of the 60.50 billion dollar range provided in the guidance. The Activision revenue numbers have been revised to account for the additional $2.05 billion in revenue. By comparison, productivity and business processes increased by 12% between the years, intelligent cloud increased by 21%, and more personal computing expanded by 17%. In comparison, the data collected said that the MPC, IC, and PBP staff were beyond the high-end range of jobs under ACSS, while the produce staff under ACSS was within the low-end range. This move of sales execution with favor toward software, through hardware, worked magic for the margin.
Nowadays, demand is turning out to be very strong, based on our well-established indicators and prospects. Active bookings by commercial clients also increased by 31% compared to last year, using the constant currency method based on the value of big Azure deals. The RPO that remains, the RPO increased by 20%, is now $235 billion, which is still escalating despite a hard comparison with a year ago. So, have a look at where Microsoft sits statistically. It is among only the few software firms that make more than $13 billion in annual revenue; that is, Microsoft’s commercial business did sequentially on its books this quarter. Prolongations still point to a strength partly warranted by the high relation of AI and consistent, compelling presentation.
Massive AI investments planned
Azure’s win on cloud performance was decisive in a quarter, and it was okay all the way, with Microsoft Cloud revenue of 23% to $35.1 billion. Azure was and still is the main catalyst for growth, and it succeeded in delivering our forecast of revenue growth of 31% year over year, again being up to the forecast. Now for the third period in a row. Moreover, we reflect on the fast branding growth of our book of business, with nearly $20B in sales for the quarter. During the March quarter, the AI jobs that had contributed 300 basis points to Azure growth in September and 600 basis points in December reached 700 basis points, becoming a core driver for Azure revenue this quarter. [Management noted that they had [negotiated] several contracts over $1 billion and stated that 100 million contracts had grown by 80% year-over-year]. We consider agreeing on larger volume and longer-term deals a good signal to growth over the medium term, so it could still have been better.
Management confirmed that the company faces constraints due to its expanding Azure AI business, and related revenues could have been even stronger. The company’s stock price jumped during the AI announcement but did not affect its internal Copilot systems. Looking forward to this year, Microsoft is most likely to invest in capacity expansion with up to 45 billion to 50 billion dollars in capital expenditures, and the following year is also fated to more in Fiscal 2024. With the advance notice of demand signals and the story of Azure investment projects, together they have shown enormous success more than ten years ago, and the investments will be a great opportunity for the company and its shareholders.
Revenue across all segments rose by 12% compared to last year (unadjusted for foreign exchange). Dynamics grew 17% in constant currency, Dynamics 365 up 22%, while Office commercial products and cloud services were 12% higher in constant currency. On balance, small and middle businesses could develop well but traveled on a more moderate path, with the main recipients being Copilot add-ons that assisted with per-seat pricing. The management said Teams now has twenty million phone seats, putting Microsoft ahead of its peers in a major long-term market that interests more clients.
Regarding relative impact, MPC had the most upside strips, comparing the actual numbers with the company’s guidance. On a year-to-year basis, Activision’s polarized acquisitions distort the comparison data. Windows, Activision, consulting, and advertising all had good quarters, reinforcing the revenues, which is why the revenue outperformed. We notice that the Activision deal is working, as missions for Diablo 4 have been integrated into Game Pass, which has helped boost user counts and interaction.
This article originally appeared in Morningstar.
