Microsoft (MSFT) Up 4.1% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Microsoft (MSFT). Shares have added about 4.1% in that time frame, underperforming the S&P 500.Will the recent positive trend continue leading up to its next earnings release, or is Microsoft due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers. Microsoft Q1 Earnings & Revenues Beat Estimates on Cloud SuccessMicrosoft reported first-quarter fiscal 2025 earnings of $3.3 per share, which beat the Zacks Consensus Estimate by 10.4% and improved 16% on a year-over-year basis.Revenues of $65.58 billion increased 16% year over year and beat the Zacks Consensus Estimate by 1.82%. At constant currency (cc), revenues grew 16% year over year.In commercial business, increased demand and growth in long-term commitments to Microsoft Cloud platform drove results.Commercial bookings were ahead of expectations and increased 30% (up 23% in cc). Results were driven by strong execution across core annuity sales motions and growth in the number of 10-million-dollar-plus contracts for both Azure and Microsoft 365 (M365). The company saw an increase in the number of 100-million-dollar-plus contracts for Azure.Commercial remaining performance obligation increased 22% (up 21% in cc) to $259 billion. Roughly 40% will be recognized in revenues in the next 12 months, up 17% year over year. The remaining portion, recognized beyond the next 12 months, increased 27%. In the reported quarter, the annuity mix was 98%.Microsoft also gained from in-period revenue recognition across Microsoft 365 commercial, Azure, and on-premises server business.FX did not have a significant impact on fiscal first-quarter results and was roughly in line with expectations on total company revenues, segment level revenues, COGS, and operating expense growth.Microsoft Cloud revenues were $38.9 billion and grew 22%, roughly in line with expectations.Segmental DetailsThe Productivity & Business Processes segment, which includes the Office and Dynamics CRM businesses, contributed 43.2% to total revenues. Revenues increased 12% (up 13% at cc) on a year-over-year basis to $28.3 billion, ahead of expectations driven by better-than-expected results across all businesses. Microsoft 365 Commercial products and cloud services revenues rose 13% (up 14% in cc). M365 commercial cloud revenues increased 15% (up 16% in cc) with business trends that were as expected. The better-than-expected result was due to a small benefit from an in-period revenue recognition. ARPU growth was primarily driven by E5 as well as M365 Copilot. Paid M365 commercial seats grew 8% year over year with installed base expansion across all customer segments. Seat growth was driven by small and medium business and frontline worker offerings. Microsoft 365 commercial cloud revenues represent nearly 90% of total M365 commercial products and cloud services.Microsoft 365 commercial products revenues increased 2% (up 3% in cc), ahead of expectations, primarily due to the benefit from in-period revenue recognition noted earlier.M365 consumer products and cloud services revenues grew 5% (up 6% in cc). M365 consumer cloud revenues increased 6% (up 7% in cc) with continued momentum in M365 consumer subscriptions, which grew 10% to 84.4 million. M365 consumer cloud revenues represent 85% of total M365 consumer products and cloud services.LinkedIn revenues rose 10% (up 9% in cc), slightly ahead of expectations, with growth across all lines of business.Segment gross margin dollars increased 11% (up 12% in cc) and gross margin percentage decreased slightly year over year due to scaling the company’s AI infrastructure. Operating expenses increased 2% and operating income increased 16%.The Intelligent Cloud segment, including server and enterprise products and services, contributed 36.7% to total revenues. The segment reported revenues of $24.1 billion, which increased 20% year over year (up 21% at cc).Server products and cloud services revenues jumped 23%, driven by Azure and other cloud services revenue growth of 33% (up 34% in cc), with healthy consumption trends that were in line with expectations. The better-than-expected result was due to the small benefit from an in-period revenue recognition. Azure growth included roughly 12 points from AI services, similar to the last quarter. Demand continues to be higher than the company’s available capacity. Non-AI growth trends were also in line with expectations in total and across regions as customers continued to migrate and modernize on the Azure platform. The non-AI point contribution to Azure growth was sequentially lower by approximately 1 point.In the on-premises server business, revenues decreased 1%. Lower-than-expected transactional purchasing ahead of the Windows Server 2025 launch, as well as lower purchasing of licenses running in multi-cloud environments, was mostly offset by the benefit from in-period revenue recognition noted earlier.Enterprise and partner services revenues decreased 1% and were relatively unchanged in constant currency.Segment gross margin dollars increased 15% and gross margin percentage decreased 3 points year over year, driven by scaling the company’s infrastructure. Operating expenses increased 8% and operating income grew 18%.More Personal Computing segment, which primarily comprises Windows, Gaming, Devices and Search businesses, contributed 20.1% to total revenues. Revenues increased 15% year over year to $13.18 billion. The growth included 15 points of net impact from the Activision acquisition. Results were above expectations driven by Gaming and Search.Windows OEM and Devices revenues increased 2% year over year as better-than-expected results in Windows OEM due to a mix shift to higher monetizing markets were partially offset by the lower-than-expected results in Devices due to execution challenges in the commercial segment.Search and news advertising revenue ex-TAC increased 18% (up 19% in cc), ahead of expectations, primarily due to continued execution improvement. The company saw rate expansion in addition to healthy volume growth in both Edge and Bing.In Gaming, revenues increased 43% (up 44% in cc), with 43 points of net impact from the Activision acquisition. Results were ahead of expectations driven by stronger-than-expected performance in both first- and third-party content as well as consoles. Xbox content and services revenues rose 61% with 53 points of net impact from the Activision acquisition.Segment gross margin dollars increased 16% and 17% in constant currency, with 12 points of net impact from the Activision acquisition. Gross margin percentage was relatively unchanged year over year. Strong execution on margin improvement in Gaming and Search was offset by a sales mix shift to those businesses.At a company level, Activision contributed a net impact of more than 3 points to revenue growth, which was a 2-point drag on operating income growth, and had a negative 5-cent impact on earnings per share. This net impact includes adjusting for the movement of Activision content from Microsoft’s prior relationship as a third-party partner to first-party and includes $911 million from purchase accounting adjustments, integration, and transaction-related costs.Operating expenses increased 49% with 51 points from the Activision acquisition. Operating income decreased 4%.Azure Boosts Microsoft's Fiscal Q1 FinancialsAzure Arc now has more than 39,000 customers across every industry, including American Tower, CTT and L’Oreal, up more than 80% year over year.Microsoft now has data centers in more than 60 regions around the world. In fiscal first quarter, MSFT announced new cloud and AI infrastructure investments in Brazil, Italy, Mexico and Sweden, as the company expanded capacity in line with long-term demand signals.At the silicon layer, new Cobalt 100 VMs are being used by companies like Databricks, Elastic, Siemens, Snowflake and Synopsys to power their general-purpose workloads at up to 50% better price performance than previous generations.On top of this, Microsoft is building out the next generation AI infrastructure, innovating across the full stack to optimize its fleet for AI workloads. MSFT is offering the broadest selection of AI accelerators, including the first-party accelerator Maia 100, as well as the latest GPUs from AMD and NVIDIA.Microsoft has become the first cloud provider to bring up NVIDIA’s Blackwell system with GB200-powered AI servers.Microsoft’s partnership with OpenAI also continues to deliver results. It has built a differentiated IP and is driving revenue momentum. More broadly, with Azure AI, the company is building an end-to-end app platform to help customers build their own copilots and agents.Azure OpenAI usage has more than doubled over the past six months, as both digital natives like Grammarly and Harvey, as well as established enterprises like Bajaj Finance, Hitachi, KT, and LG, move apps from test to production.GE Aerospace, for example, used Azure OpenAI to build a new digital assistant for all 52,000 of its employees. In just three months, it has been used to conduct over 500,000 internal queries and process more than 200,000 documents.In the fiscal first quarter, Microsoft added support for OpenAI’s newest model family o1. MSFT is also bringing industry-specific models to Azure AI, including a collection of best-in-class multimodal models for medical imaging.With GitHub Models, Microsoft now provides access to the full model catalog directly within the GitHub developer workflow.As developers build new AI apps on Azure, Microsoft has seen an acceleration of Azure Cosmos DB and Azure SQL DB Hyperscale usage, as customers like Air India, Novo Nordisk, Telefonica, Toyota Motor North America and Uniper take advantage of capabilities purpose-built for AI applications.With Microsoft Fabric, Microsoft provides a single AI-powered platform to help customers like Chanel, EY, KPMG, Swiss Air, and Syndigo unify their data across clouds. The company now has over 16,000 paid Fabric customers, including over 70% of the Fortune 500.Microsoft's AI Copilot Adoption Surges in Q1GitHub Copilot is bending the productivity curve for developers. In the quarter, Copilot Enterprise customers increased 55% quarter over quarter as companies like AMD and Flutter Entertainment tailor Copilot to their codebase.Microsoft is introducing the next phase of AI code generation, making GitHub Copilot agentic across the developer workflow. GitHub Copilot Workspace is a developer environment that leverages agents from start to finish, so developers can go from spec, to plan, to code, all in natural language.Copilot Autofix is an AI agent that helps developers at companies like Asurion and Otto Group fix vulnerabilities in their code over three times faster than it would take them on their own.Microsoft is also continuing to build on GitHub’s open platform ethos by making more models available via GitHub Copilot.The company is expanding the reach of GitHub to a new segment of developers, introducing GitHub Spark, which enables anyone to build apps in natural language.Microsoft has brought generative AI to Power Platform to help customers use the low-code/no-code tools to cut costs and development time. To date, nearly 600,000 organizations have used AI-powered capabilities in Power Platform, up 4X year over year.Citizen developers at ZF, for example, build apps simply by describing what they need using natural language.In the fiscal first quarter, Microsoft introduced new ways for customers to apply AI to streamline complex workflows with Power Automate.Microsoft also launched the next wave of Microsoft 365 Copilot innovation last month, bringing together web, work, and Pages as a new design system for knowledge work. Pages is the first new digital artifact for the AI age, and it is designed to help you ideate with AI and collaborate with other people. The company has also made Microsoft 365 Copilot responses 2X faster and improved response quality by nearly 3X. This innovation is driving accelerated usage and the number of people who use Microsoft 365 Copilot daily more than doubled quarter over quarter.The company is witnessing increased adoption from customers in every industry as it uses Microsoft 365 Copilot to drive real business value. Vodafone, for example, will roll out Microsoft 365 Copilot to 68,000 employees after a trial showed that on average it saved three hours per person per week. UBS will deploy 50,000 seats in Microsoft’s largest FinServ deal to date.Microsoft continues to see enterprise customers coming back to buy more seats. All-up, nearly 70% of the Fortune 500 now use Microsoft 365 Copilot, and customers continue to adopt it at a faster rate than any other new Microsoft 365 suite.Copilot is the UI for AI, and with Microsoft 365 Copilot, Copilot Studio, agents and now autonomous agents MSFT has built an end-to-end system for AI business transformation. With Copilot Studio, organizations can build and connect Microsoft 365 Copilot to autonomous agents, which are then delegated to Copilot when there is an exception.More than 100,000 organizations, from Nsure, Standard Bank and Thomson Reuters, to Virgin Money and Zurich Insurance have used Copilot Studio to date, up over 2X quarter over quarter.More broadly, Microsoft is seeing AI drive a fundamental change in the business applications market, as customers shift from legacy apps to AI-first business process. Dynamics 365 continues to take share as organizations like Everon, HEINEKEN, and Lexmark choose the apps over other providers.Monthly active users of Copilot across CRM and ERP portfolios increased more than 60% quarter over quarter.Dynamics 365 Contact Center is also winning customers like Currys, Le Creuset and RXO, as it brings generative AI to every customer engagement channel.Microsoft is also bringing AI to industry-specific workflows. One year in, DAX Copilot is now documenting over 1.3 million physician-patient encounters each month at more than 500 healthcare organizations like Baptist Medical Group, Baylor Scott & White, Greater Baltimore Medical Center, Novant Health and Overlake Medical Center.Microsoft Teams usage remains at all-time highs as people use it to streamline all their communications. Nearly 75% of Teams Enterprise customers now buy Premium, Phone, or Rooms.The new class of Copilot+ PCs is winning new customers. AMD, Intel, and Qualcomm now all support Copilot+ PCs.Operating ResultsGross profit increased 13.1% year over year to $45.48 billion. The gross margin contracted 180 basis points (bps) to 69.4% on a year-over-year basis due to the lower Microsoft Cloud gross margin, as well as the impact of purchase accounting adjustments, integration and transaction-related costs from the Activision acquisition.Microsoft Cloud’s gross margin percentage decreased 2 points year over year to 71%. This was slightly better than expected due to improvement in Azure, although the gross margin percentage decreased year over year and continues to be driven by scaling MSFT’s AI infrastructure.Operating expenses rose 12.1% year over year to $14.9 billion, lower than expected due to our focus on cost efficiencies and ongoing prioritization work. Operating expense growth included 9 points from the Activision acquisition.Operating income increased 14% and operating margins were 47%, down 1 point year-over-year. Excluding the net impact from the Activision acquisition, operating margins were up 1 point as Microsoft continued to drive efficiencies across businesses driven by investment in AI infrastructure and capabilities.Productivity & Business Process operating income rose 15.5% to $16.51 billion. Intelligent Cloud operating income increased 17.9% to $10.5 billion. More Personal Computing’s operating income decreased 4.3% to $3.53 billion.Balance Sheet & Cash FlowAs of Sept. 30, 2024, Microsoft had total cash, cash equivalents and short-term investments balance of $78.42 billion compared with $75.54 billion as of June 30, 2024.As of Sept. 30, 2024, long-term debt (including the current portion) was $42.86 billion compared with $44.9 billion as of June 30, 2024.Cash flow from operations was $34.2 billion, up 12%, driven by strong cloud billings and collections, partially offset by higher supplier, employee, and tax payments. Free cash flow was $19.3 billion, down 7% year over year, reflecting higher capital expenditures to support our cloud and AI offerings.Microsoft returned $9 billion to shareholders in the form of dividends and share repurchases in the first quarter of fiscal year 2025.GuidanceFor the fiscal second quarter, Microsoft expects the cost of revenues between $21.9 billion and $22.1 billion and operating expenses to grow in the $16.4-$16.5 billion range. Other income and expenses are expected to be roughly $(1.5) billion.The company expects revenue growth in the productivity and business processes segment between $28.7 billion and $29 billion. MSFT expects Office 365 Commercial revenue growth to be roughly 14% at cc. Office Commercial products revenues are expected to decline in the low-single digit.In Office Consumer products and cloud services, Microsoft expects revenue growth in mid-single digits. For LinkedIn, the company expects revenue growth to be nearly 10%. In Dynamics, MSFT expects revenue growth in the mid-to-high teens.For Intelligent Cloud, Microsoft anticipates revenues between $25.55 billion and $25.85 billion. In Azure, MSFT expects revenue growth at cc between 31% and 32%. In Enterprise Services, revenues are expected to grow in low-single digits. The company expects Server product revenues to decline in the low-to-mid single digits.For More Personal Computing, the company projects revenues between $13.85 billion and $14.25 billion. It expects Windows OEM revenues to grow in low-to-mid single digits.In Gaming, Microsoft expects revenues to decline in high-single digit. Microsoft expects Xbox content and services revenue growth to remain relatively flat year over year.How Have Estimates Been Moving Since Then?In the past month, investors have witnessed a downward trend in fresh estimates.VGM ScoresCurrently, Microsoft has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.OutlookEstimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Microsoft has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.Free Today: Profiting from The Future’s Brightest Energy SourceThe demand for electricity is growing exponentially. At the same time, we’re working to reduce our dependence on fossil fuels like oil and natural gas. Nuclear energy is an ideal replacement.Leaders from the US and 21 other countries recently committed to TRIPLING the world’s nuclear energy capacities. This aggressive transition could mean tremendous profits for nuclear-related stocks – and investors who get in on the action early enough.Our urgent report, Atomic Opportunity: Nuclear Energy's Comeback, explores the key players and technologies driving this opportunity, including 3 standout stocks poised to benefit the most.Download Atomic Opportunity: Nuclear Energy's Comeback free today.Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Microsoft Corporation (MSFT): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks