Microsoft (MSFT -0.18%) delighted investors Tuesday afternoon as the tech giant delivered strong results in its fiscal third-quarter earnings report, even in a difficult environment.
The Windows maker executed where it mattered most. Overall revenue rose 7%, or 10% in constant currency, to $52.9 billion, better than estimates at $51 billion.
Microsoft also beat bottom-line estimates as earnings per share rose 10% to $2.45, topping the consensus at $2.23. Operating margin remained strong at 42%, and the stock jumped 9% in after-hours trading on those results and strong guidance.
As you can see from the chart below, revenue growth leaned toward cloud services, including Azure and productivity products like its Office software suite, while costs rose in line with revenue.
Image Source: The Motley Fool.
Executing where it matters most
Even better than the top- and bottom-line beats was that Microsoft delivered strong growth in its highest-priority areas. Intelligent Cloud, which is now its biggest segment, saw revenue rise 16% to $22.1 billion, driven by Azure revenue growing 27%. The company doesn't break out revenue for Azure, but it makes up the substantial majority of the Intelligent Cloud segment.
The success there and in areas like Office and Windows Commercial products, driven in part by Teams and Dynamics, more than made up for a sharp decline in revenue from devices and Windows OEM revenue as PC sales have declined following the pandemic boom. You can see those challenges reflected in the More Personal Computing segment in the chart above.
Azure, meanwhile, continues to be the company's most important growth driver, anchoring customers onto other Microsoft products and profitably scaling with demand. Azure again gained market share during the quarter, and Microsoft introduced more than a dozen new Azure products, including integration with the likes of Databricks and RedHat. It ramped up its new OpenAI service, giving customers access to OpenAI tools like GPT-3.5, Codex, and Dall-E 2 for text, code, and image generation. Azure OpenAI now has 2,500 customers, up 10 times from the second quarter.
Azure has also launched other AI tools like new machine learning features and an AI dashboard for retailers.
Leaning into AI
Following its $10 billion investment in OpenAI just months ago, Microsoft is stepping up its efforts in artificial intelligence.
In LinkedIn, for example, Generative AI offers personalized writing suggestions for Premium subscribers, and AI tools allow employers to write job descriptions to help attract the best candidates.
It's integrating OpenAI's powerful GPT-4 in software development with GitHub Copilot X, which offers AI suggestions for code.
In Teams, users can get AI-powered real-time translations in 40 languages, and of course, the company introduced the new AI-powered Bing and Edge browser, which offers ChatGPT-like assistance along with conventional internet search.
Search and news advertising revenue rose 10% in the quarter, matching the prior quarter, and had a 3 percentage-point benefit from the acquisition of Xandr. Growth in that category was better than the 2% revenue growth Google Search had in its first quarter. There's no evidence yet that Bing is taking market share from Google, but the "race," as Microsoft CEO Satya Nadella called it, has only just begun.
Overall, those applications show that the company is taking advantage of OpenAI and other AI tools in ways that go well beyond Bing. While internet search represents the biggest market for AI to disrupt, Microsoft is unique in its ability to apply this new technology in areas like social media, collaboration software, and software development and coding, giving it an advantage over its peers.
Steady growth ahead
The third quarter left little to be desired as the company delivered solid growth in a challenging macro environment. In fact, revenue growth accelerated from just 2% in the second quarter, and it returned to profit growth after a decline in the previous quarter.
In its guidance for the fourth quarter, the company called for similar trends to the third quarter, seeing 10% to 12% revenue growth in productivity and business processes and 15% to 16% revenue growth in intelligent cloud. In more personal computing, it sees a moderating decline at 5% to 7%. At the midpoint of that guidance, that implies overall revenue of $56.1 billion, or 8% top-line growth.
That guidance, as well as the company's potential in AI, should reassure investors that the company is on the right track. Given those results and the guidance, it's not a surprise the stock was flying higher after hours on Tuesday. Despite trading at a premium, the stock continues to look like a buy.
