Microsoft Earnings Outlook

By Aditya Soni

(Reuters) – Microsoft (NASDAQ:MSFT) is expected to report its slowest quarterly revenue growth in a year on Wednesday, while investors await signs of AI demand amid growing worries about the slow payoff from hefty investments in the technology.

The software giant is widely seen as the front-runner in the race to capitalize on generative AI, in part thanks to its investment in ChatGPT-owner OpenAI. However, recent reports indicate slow adoption for key products, including the $30-per-month Copilot assistant for enterprises.

Morgan Stanley analysts note a "wall of worry" surrounding Microsoft's earnings, pointing to "ramping capital expenditures, margin compression, lack of evidence on AI returns, and messiness post a financial resegmentation."

The results will be the first since the company reorganized its reporting structure in August to align more closely with its management approach. Unfortunately, this has complicated estimations of last quarter's performance.

Since its last earnings report in late July, the company's stock has risen by about 1%, considerably underperforming the benchmark S&P 500; however, the stock has increased around 14% for the year.

Microsoft's Azure cloud-computing unit likely grew 33% in the fiscal first quarter ending September 30, as estimated by seven analysts polled by Visible Alpha. This aligns with the company's expectations but is slightly lower than fourth-quarter growth.

Although AI's impact on Azure’s growth increased by 11 percentage points last quarter, the overall business growth has slowed. Microsoft previously indicated that it expects Azure growth to accelerate in the second half of the fiscal year.

Total revenue is anticipated to have risen 14.1% to $64.51 billion in the September quarter, according to analysts polled by LSEG.

Microsoft, similar to its AI competitors, has warned that spending in this area will remain high, with capital expenditures in the September quarter estimated to have jumped 71.7% to $19.23 billion according to Visible Alpha.

Copilot Skepticism

Copilot has not experienced the uptake Microsoft anticipated. A survey by Gartner involving 152 IT companies revealed that most have yet to move their Copilot initiatives beyond the pilot phase as of August.

Some analysts believe that Microsoft's recent advancements, particularly the introduction of autonomous AI agents capable of executing routine tasks with the aid of Copilot, could improve adoption rates for the assistant. Melius Research analyst Ben Reitzes stated, "Most investors seem skeptical of 365 Copilot adoption since they aren't using it personally very much. However, it seems Copilot data points are getting modestly better," adding that the assistant has a growing and improving customer base.

Bernstein analyst Mark Moerdler, who is among the top-rated for the company according to LSEG, expects Microsoft’s productivity and business processes unit, which includes Office products, LinkedIn, and 365 Copilot, to report stable quarter-on-quarter growth of 12%. Revenue in the intelligent cloud sector, which includes Azure, likely increased by 20%, maintaining the same growth pace as the previous quarter. Moerdler also indicated that growth in the more personal computing unit, which encompasses Windows and gaming, has likely picked up as the PC market stabilizes.