Microsoft Reports Earnings Today. What to Expect.

Microsoft shares have surged 36% in 2023, amid investor excitement about the company’s substantial investment in OpenAI, its integration of AI software into Bing, and its rollout of AI Copilot software across its software lineup.

But investors have belatedly come to realize that the creation of AI software tools also involves considerable upfront investment in computing resources, putting pressure on margins.

Sure enough, the stock is down 7% since the company last reported earnings in late July, amid disappointment that results had yet to show a real boost from AI. It will take time for the new software to reach customers, and earlier this year investor expectations got ahead of reality.

One area where Microsoft will have real answers is around the cloud. investors will be zeroed in on actual and expected growth for its Azure cloud computing business. In recent quarters, business has slowed as some cloud customers looked for ways to make their cloud outlays more efficient.

Microsoft’s guidance implied 25% to 26% Azure growth for the September quarter, compared with 26% in the June quarter. Microsoft has said it expects AI related work to give Azure a two percentage point boost in the September quarter, up from a one point lift in the June quarter.

Cowen analyst Derrick Wood writes in a research note that the question he gets most about Microsoft is how the company will guide Azure growth for the December quarter. He contends investor expectations are in the 25% to 26% range, with there points of growth from AI. Any deviation in either direction could trigger a move in the stock, but he projects a “down the middle guide.”

Guggenheim analyst John DiFucci says this quarter is unlikely to be a big mover for Microsoft shares.

“We don’t expect this quarter’s results to provide a strong indication of Microsoft’s development in GenAI in either direction, which is the narrative that we believe will drive the stock’s progression over the medium term,” he writes in a note previewing the quarter.

That said, DiFucci sees potential September quarter upside for Office and Windows, noting that consensus estimates for Windows “reflects guidance that assumes much worse PC shipments than was ever likely.” He does see some risk for the Azure business.

DiFucci thinks December quarter results will be a better indicator of the stock’s direction from here, since it will include two months of general availability of Copilot software for Microsoft 365, the company’s suite of productivity applications that includes Word, Excel and PowerPoint. The AI add-on launches Nov. 1.

For Microsoft’s September quarter, Wall Street’s consensus as measured by FactSet calls for revenue of $54.5 billion, up 8.8%, with profit of $2.65 a share, up from $2.35 a year earlier. 

That includes 15.6% revenue growth, to $23.5 billion, for the company’s Intelligent Cloud segment, which includes Azure; 10.5% growth, to $18.2 billion, for the Productivity and Business Processes segment, which includes Office and other applications; and a 3.6% decline in revenue, to $12.9 billion, from the More Personal Computing segment, with results weighed down by continued weak personal computer demand.

For the December quarter, Wall Street is forecasting overall sales of $58.7 billion, with profits of $2.66 a share, but those estimates likely don’t reflect expected contributions from Microsoft’s recently completed acquisition of Activision. 

By segment, December quarter consensus forecasts call for $25 billion in revenue for Intelligent Cloud, $18.8 billion for Productivity and Business Processes, and $13.7 billion for More Personal Computing, not including Activision.

Beyond AI and the cloud, analysts are likely to focus on three other areas: the impact of Activision on Microsoft’s outlook and its capital allocation plans, the outlook for PC demand, and the status of the company’s ongoing tax dispute with the Internal Revenue Service.

Write to Eric J. Savitz at [email protected]