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Microsoft (MSFT) Q3 Earnings & Revenues Beat on Cloud Strength
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Microsoft (MSFT - Free Report) reported third-quarter fiscal 2024 earnings of $2.94 per share, which beat the Zacks Consensus Estimate by 4.63% and improved 20% on a year-over-year basis. At constant currency (cc), earnings increased 20% year over year.
Revenues of $61.85 billion increased 17% year over year and beat the Zacks Consensus Estimate by 2%. At cc, revenues grew 17% year over year.
Commercial bookings increased 29% year over year and 31% at cc, which came ahead of expectations, driven by Azure commitments with an increase in average deal size and deal length, as well as strong execution across the company’s core annuity sales motions.
Commercial remaining performance obligation increased 20% year over year (up 21% at cc) to $235 billion. Roughly 45% will be recognized in revenues in the next 12 months, up 20% year over year. The remaining portion, which will be recognized beyond the next 12 months, increased 21%.
Microsoft Cloud revenues were $35.1 billion, up 23% (up 23% at cc) year over year, driven by strong execution by sales teams and partners.
In the consumer business, the personal computer (PC) market demand was slightly better than expected, benefiting Windows OEM, while advertising spend landed relatively in line with expectations.
In Gaming, Microsoft saw a better-than-expected performance of Activision titles, benefiting Xbox content and services. The company completed the acquisition of Activision Blizzard on Oct 13, 2023.
Microsoft Corporation Price, Consensus and EPS Surprise
The Productivity & Business Processes segment, which includes the Office and Dynamics CRM businesses, contributed 31.6% to total revenues. Revenues increased 12% (up 11% at cc) on a year-over-year basis to $19.6 billion, primarily driven by better-than-expected results in LinkedIn, and beat the consensus mark by 0.34%.
Office commercial products and cloud services revenues grew 13% (up 12% at cc). Office 365 commercial revenues increased 15%, which came in line with expectations, driven by healthy renewal execution, ARPU growth from continued E5 momentum and early progress in Copilot for Microsoft 365.
The company surpassed one million Teams Rooms for the first time as it continues to make hybrid meetings better with new AI-powered features like automatic camera switching and speaker recognition. Teams Phone continues to be the market leader in cloud calling, now with more than 20 million PSTN users, up nearly 30% year over year. Such innovations are driving growth across Microsoft 365.
Paid Office 365 commercial seats grew 8% year over year, with installed base expansion across all customer segments. Seat growth was driven by small and medium business (SMB) and frontline worker offerings, although growth continued to moderate in SMB.
Office commercial licensing declined 20% and 18% at cc, with continued customer shift to cloud offerings.
Office consumer revenues increased 4%, which was slightly below expectations. Microsoft 365 subscriptions grew 14% to 80.8 million.
LinkedIn revenues rose 10% (up 9% at cc), which came ahead of expectations, driven by a better-than-expected performance in Premium Subscriptions and Talent Solutions businesses.
However, in Talent Solutions, bookings growth continues to be negatively impacted by the weaker hiring environment in key verticals. New AI features are also helping accelerate LinkedIn Premium growth, with revenues increasing 29% year over year.
Dynamics revenues jumped 19% (up 17% at cc), which was ahead of expectations, driven by Dynamics 365 that soared 23% (up 22% at cc) with continued rise across all workloads and better-than-expected new business, though bookings growth remains moderate.
The Intelligent Cloud segment, including server and enterprise products and services, contributed 43.2% to total revenues. The segment reported revenues of $26.7 billion, which increased 21% year over year (up 21% at cc) and beat the consensus mark by 1.87%.
Server products and cloud services revenues jumped 24% (up 24% at cc), driven by Azure and other cloud services revenue growth of 31% (up 31% at cc), including roughly 7 points from AI services.
In the non-AI portion of the consumption business, Microsoft saw greater-than-expected demand broadly across industries and customer segments, as well as some benefit from a better-than-expected mix of contracts with higher in-period recognition.
In per-user business, the enterprise mobility and security installed base grew 10% to more than 274 million seats, with continued impact from the growth trends in the new standalone business noted earlier.
In on-premises server business, revenues rose 6%, which was ahead of expectations, driven by better-than-expected renewal strength, particularly for contracts with higher in-period revenue recognition.
Enterprise and partner services revenues decreased 9% on a strong prior-year comparable for Enterprise Support Services.
More Personal Computing segment, which primarily comprises Windows, Gaming, Devices and Search businesses, contributed 25.2% to total revenues. Revenues increased 17% year over year (up 17% at cc) to $15.6 billion and beat the Zacks Consensus Estimate by 4.36%. The growth included 15 points of net impact from the Activision acquisition. Results were above expectations, driven by a better-than-expected performance in Gaming and Windows OEM.
Windows OEM revenues increased 11% year over year, which was ahead of expectations, primarily driven by the slightly better PC market, as well as a mix shift to higher monetizing markets.
Windows Commercial products and cloud services revenues grew 13% (up 12% at cc), which was below expectations with growth trends in new standalone business, as well as lower in-period revenue recognition from the mix of contracts.
Devices revenues plunged 17% (down 16% at cc) as the company remained focused on higher margin premium products. Overall Surface demand was slightly lower than expected.
Search and news advertising revenues ex-TAC climbed 12%, which was ahead of expectations with continued volume growth and increased engagement on Bing and Edge. Bing reached more than 140 million daily active users.
Gaming revenues soared 51% (up 50% at cc), with 55 points of net impact from the Activision acquisition. Total Gaming revenues were ahead of expectations, primarily driven by Call of Duty.
Xbox content and services revenues increased 62% (up 61% at cc), driven by 61 points of net impact from the Activision acquisition. Xbox hardware revenues declined 31% (down 30% at cc).
At a company level, Activision contributed a net impact of approximately 4 points to revenue growth, which was a 2-point drag on operating income growth and had a negative 4 cents impact on earnings per share. A reminder that this net impact includes adjusting for the movement of Activision content from the company’s prior relationship as a third-party partner to first-party, and also includes $935 million from purchase accounting adjustments, integration and transaction-related costs.
Azure Propels Microsoft's Fiscal Q3 Performance
Microsoft offers the most diverse selection of AI accelerators, including the latest from NVIDIA and AMD, as well as the company’s own first-party silicon. MSFT’s AI innovation continues to build on its strategic partnership with OpenAI. More than 65% of the Fortune 500 now use Azure OpenAI Service. The company also continues to innovate and partner broadly to bring customers the best selection of frontier models and open-source models, LLMs and SLMs.
The company is set to offer the most capable and cost-effective SLM through the recently announced launch of Phi-3, which is currently in trial by companies like CallMiner, LTIMindtree, PwC and TCS.
Microsoft’s Models as a Service offering makes it easy for developers to use LLMs and SLMs without having to manage any underlying infrastructure. Hundreds of paid customers, from Accenture and EY to Schneider Electric, are using it to take advantage of API access to third-party models, including the latest from Cohere, Meta and Mistral.
As part of a partnership announced last week, G42 will run its AI applications and services on Microsoft’s cloud.
The number of Azure AI customers and average spend continue to grow. Microsoft witnessed an acceleration of revenues from migrations to Azure. Notably, Azure Arc continues to help customers like DICK’S Sporting Goods and World Bank streamline their cloud migrations. Arc now has 33,000 customers, up more than 2X year over year.
MSFT has become the hyperscale platform of choice for SAP and Oracle workloads, with Conduent and Medline moving their on-premises Oracle estates to Azure, and Kyndryl and L’Oreal migrating their SAP workloads to Azure.
The company is seeing an acceleration in the number of large Azure deals from leaders across industries, including billion-dollar-plus multi-year commitments announced recently from Cloud Software Group and The Coca-Cola Company.
In the fiscal third quarter, the number of 100 million dollar-plus Azure deals increased more than 80% year over year, while the number of 10 million dollar-plus deals more than doubled.
More than half of Azure AI customers also use the company’s data and analytics tools. Customers are building intelligent applications running on Azure PostgreSQL and Cosmos DB, with deep integrations with Azure AI.
MSFT is also encouraged by the momentum in its next-generation analytics platform, Microsoft Fabric. Fabric now has more than 11,000 paid customers, including leaders in every industry, from ABB, EDP and Energy Transfer to Equinor, Foot Locker, Itochu and Lumen.
Fabric is seamlessly integrated with Azure AI Studio, meaning customers can run models against enterprise data that is consolidated in Fabric’s multi-cloud data lake, OneLake. Power BI, which is also natively integrated with Fabric, provides business users with AI-powered insights. The company now has more than 350K paid customers.
Microsoft Witnesses Strong Copilot Adoption in Q3
GitHub Copilot is bending the productivity curve for developers. Microsoft now has 1.8 million paid subscribers, with growth accelerating to more than 35% quarter over quarter, and continues to see increased adoption from businesses in every industry, including Itaú, Lufthansa Systems, Nokia (NOK - Free Report) , Pinterest (PINS - Free Report) and Volvo (VLVLY - Free Report) Cars.
Copilot is driving growth across the broader GitHub platform too. AT&T, Citigroup and Honeywell increased their overall GitHub usage after seeing productivity and code quality increases with Copilot.
More than 90% of the Fortune 100 are now GitHub customers and revenues accelerated more than 45% year over year in the fiscal third quarter.
30,000 customers across every industry have used Copilot Studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter over quarter. Cineplex, for example, built a copilot for customer service agents, reducing query handling time from as much as 15 minutes to 30 seconds.
More than 330,000 organizations, including over half of the Fortune 100, have used AI-powered capabilities in Power Platform. Power Apps now have more than 25 million monthly active users, up over 40% year over year.
Copilot is now available to organizations of all types and sizes, from enterprises to small businesses. Nearly 60% of the Fortune 500 now use Copilot with accelerated adoption across industries and geographies, from companies like Amgen, BP, Cognizant, Koch Industries, Moody’s, Novo Nordisk, NVIDIA and Tech Mahindra purchasing more than 10,000 seats.
Microsoft is witnessing increased usage intensity from early adopters, including a nearly 50% increase in the number of Copilot-assisted interactions per user in Teams, bridging group activity with business process workflows and enterprise knowledge.
The company has added more than 150 Copilot capabilities since the beginning of the year. With Copilot in Dynamics 365, Microsoft is helping businesses transform every role and business function. Copilot for Service and Copilot for Sales are broadly available, helping customer service agents and sellers at companies like Land O’Lakes, Northern Trust, Rockwell Automation and Toyota Group generate role-specific insights and recommendations from across Dynamics 365 and Microsoft 365, as well as third-party platforms like Salesforce, ServiceNow and Zendesk.
Copilot for Finance is helping enterprises to reduce labor-intensive processes like collections and contract and invoice capture for companies like Dentsu and IDC. ISVs are also building their own Copilot integrations. For example, new integrations between Adobe Experience Cloud and Copilot will help marketers access campaign insights in the flow of their work.
When it comes to devices, Copilot in Windows is now available on nearly 225 million Windows 10 and Windows 11 PCs, up 2X quarter over quarter.
In healthcare, DAX Copilot is being used by more than 200 healthcare organizations, including Providence, Stanford Health Care and WellSpan Health.
Operating Results
Gross profit increased 18% year over year to $43.3 billion. The gross margin expanded 60 basis points (bps) to 70.1% on a year-over-year basis. Microsoft Cloud’s gross margin decreased slightly year over year to 72%.
Operating expenses rose 9.7% year over year to $15.77 billion, with 9 points from the Activision acquisition.
Operating income of $27.5 billion increased 23.4% (up 23% at cc). The operating margin expanded 230 bps on a year-over-year basis to 44.6%.
Productivity & Business Process operating income rose 17.4% to $10.14 billion, beating the Zacks Consensus Estimate by 0.21%.
Intelligent Cloud operating income increased 32% to $12.51 billion, beating the consensus mark by 7.45%.
More Personal Computing’s operating income increased 16.2% to $4.92 billion, which missed the consensus mark by 20.17%.
Balance Sheet & Cash Flow
As of Mar 31, 2024, Microsoft had total cash, cash equivalents and short-term investments balance of $80.02 billion compared with $81.01 billion as of Dec 31, 2023.
As of Mar 31, 2024, long-term debt (including the current portion) was $42.6 billion compared with $47.1 billion as of Dec 31, 2023.
Cash flow from operations was $31.9 billion, up 31%, driven by strong cloud billings and collections. Free cash flow was $21 billion, up 18% year over year, reflecting higher capital expenditures to support our cloud and AI offerings.
In the reported quarter, the company returned $8.4 billion to shareholders in the form of share repurchases and dividends payouts ($5.57 billion).
Guidance
For the fiscal fourth quarter, Microsoft expects the cost of revenues between $19.6 billion and $19.8 billion and operating expenses to grow in the $17.15-$17.25 billion range. Other income and expenses are expected to be roughly $(850) million.
The company expects revenue growth in the productivity and business processes segment between $19.9 billion and $20.2 billion.
MSFT expects Office 365 Commercial revenue growth to be roughly 14% at cc. Office Commercial products revenues are expected to decline in the mid-to-high teens.
In Office Consumer products and cloud services, Microsoft expects revenue growth in the low-to-mid single digits. For LinkedIn, the company expects revenue growth in the mid-to-high single digits. In Dynamics, MSFT expects revenue growth in the low-to-mid teens.
For Intelligent Cloud, Microsoft anticipates revenues between $28.4 billion and $28.7 billion.
In Azure, MSFT expects revenue growth at cc between 30% and 31%. In Enterprise Services, revenues are expected to decline mid-to-high single digits. The company expects Server revenue growth in the low-to-mid single digits.
For More Personal Computing, the company projects revenues between $15.2 billion and $15.6 billion. It expects Windows OEM revenues to grow in the low-to-mid single digits.
Image: Bigstock
Microsoft (MSFT) Q3 Earnings & Revenues Beat on Cloud Strength
Microsoft (MSFT - Free Report) reported third-quarter fiscal 2024 earnings of $2.94 per share, which beat the Zacks Consensus Estimate by 4.63% and improved 20% on a year-over-year basis. At constant currency (cc), earnings increased 20% year over year.
Revenues of $61.85 billion increased 17% year over year and beat the Zacks Consensus Estimate by 2%. At cc, revenues grew 17% year over year.
Commercial bookings increased 29% year over year and 31% at cc, which came ahead of expectations, driven by Azure commitments with an increase in average deal size and deal length, as well as strong execution across the company’s core annuity sales motions.
Commercial remaining performance obligation increased 20% year over year (up 21% at cc) to $235 billion. Roughly 45% will be recognized in revenues in the next 12 months, up 20% year over year. The remaining portion, which will be recognized beyond the next 12 months, increased 21%.
Microsoft Cloud revenues were $35.1 billion, up 23% (up 23% at cc) year over year, driven by strong execution by sales teams and partners.
In the consumer business, the personal computer (PC) market demand was slightly better than expected, benefiting Windows OEM, while advertising spend landed relatively in line with expectations.
In Gaming, Microsoft saw a better-than-expected performance of Activision titles, benefiting Xbox content and services. The company completed the acquisition of Activision Blizzard on Oct 13, 2023.
Microsoft Corporation Price, Consensus and EPS Surprise
Microsoft Corporation price-consensus-eps-surprise-chart | Microsoft Corporation Quote
Segmental Details
The Productivity & Business Processes segment, which includes the Office and Dynamics CRM businesses, contributed 31.6% to total revenues. Revenues increased 12% (up 11% at cc) on a year-over-year basis to $19.6 billion, primarily driven by better-than-expected results in LinkedIn, and beat the consensus mark by 0.34%.
Office commercial products and cloud services revenues grew 13% (up 12% at cc). Office 365 commercial revenues increased 15%, which came in line with expectations, driven by healthy renewal execution, ARPU growth from continued E5 momentum and early progress in Copilot for Microsoft 365.
The company surpassed one million Teams Rooms for the first time as it continues to make hybrid meetings better with new AI-powered features like automatic camera switching and speaker recognition. Teams Phone continues to be the market leader in cloud calling, now with more than 20 million PSTN users, up nearly 30% year over year. Such innovations are driving growth across Microsoft 365.
Paid Office 365 commercial seats grew 8% year over year, with installed base expansion across all customer segments. Seat growth was driven by small and medium business (SMB) and frontline worker offerings, although growth continued to moderate in SMB.
Office commercial licensing declined 20% and 18% at cc, with continued customer shift to cloud offerings.
Office consumer revenues increased 4%, which was slightly below expectations. Microsoft 365 subscriptions grew 14% to 80.8 million.
LinkedIn revenues rose 10% (up 9% at cc), which came ahead of expectations, driven by a better-than-expected performance in Premium Subscriptions and Talent Solutions businesses.
However, in Talent Solutions, bookings growth continues to be negatively impacted by the weaker hiring environment in key verticals. New AI features are also helping accelerate LinkedIn Premium growth, with revenues increasing 29% year over year.
Dynamics revenues jumped 19% (up 17% at cc), which was ahead of expectations, driven by Dynamics 365 that soared 23% (up 22% at cc) with continued rise across all workloads and better-than-expected new business, though bookings growth remains moderate.
The Intelligent Cloud segment, including server and enterprise products and services, contributed 43.2% to total revenues. The segment reported revenues of $26.7 billion, which increased 21% year over year (up 21% at cc) and beat the consensus mark by 1.87%.
Server products and cloud services revenues jumped 24% (up 24% at cc), driven by Azure and other cloud services revenue growth of 31% (up 31% at cc), including roughly 7 points from AI services.
In the non-AI portion of the consumption business, Microsoft saw greater-than-expected demand broadly across industries and customer segments, as well as some benefit from a better-than-expected mix of contracts with higher in-period recognition.
In per-user business, the enterprise mobility and security installed base grew 10% to more than 274 million seats, with continued impact from the growth trends in the new standalone business noted earlier.
In on-premises server business, revenues rose 6%, which was ahead of expectations, driven by better-than-expected renewal strength, particularly for contracts with higher in-period revenue recognition.
Enterprise and partner services revenues decreased 9% on a strong prior-year comparable for Enterprise Support Services.
More Personal Computing segment, which primarily comprises Windows, Gaming, Devices and Search businesses, contributed 25.2% to total revenues. Revenues increased 17% year over year (up 17% at cc) to $15.6 billion and beat the Zacks Consensus Estimate by 4.36%. The growth included 15 points of net impact from the Activision acquisition. Results were above expectations, driven by a better-than-expected performance in Gaming and Windows OEM.
Windows OEM revenues increased 11% year over year, which was ahead of expectations, primarily driven by the slightly better PC market, as well as a mix shift to higher monetizing markets.
Windows Commercial products and cloud services revenues grew 13% (up 12% at cc), which was below expectations with growth trends in new standalone business, as well as lower in-period revenue recognition from the mix of contracts.
Devices revenues plunged 17% (down 16% at cc) as the company remained focused on higher margin premium products. Overall Surface demand was slightly lower than expected.
Search and news advertising revenues ex-TAC climbed 12%, which was ahead of expectations with continued volume growth and increased engagement on Bing and Edge. Bing reached more than 140 million daily active users.
Gaming revenues soared 51% (up 50% at cc), with 55 points of net impact from the Activision acquisition. Total Gaming revenues were ahead of expectations, primarily driven by Call of Duty.
Xbox content and services revenues increased 62% (up 61% at cc), driven by 61 points of net impact from the Activision acquisition. Xbox hardware revenues declined 31% (down 30% at cc).
At a company level, Activision contributed a net impact of approximately 4 points to revenue growth, which was a 2-point drag on operating income growth and had a negative 4 cents impact on earnings per share. A reminder that this net impact includes adjusting for the movement of Activision content from the company’s prior relationship as a third-party partner to first-party, and also includes $935 million from purchase accounting adjustments, integration and transaction-related costs.
Azure Propels Microsoft's Fiscal Q3 Performance
Microsoft offers the most diverse selection of AI accelerators, including the latest from NVIDIA and AMD, as well as the company’s own first-party silicon. MSFT’s AI innovation continues to build on its strategic partnership with OpenAI. More than 65% of the Fortune 500 now use Azure OpenAI Service. The company also continues to innovate and partner broadly to bring customers the best selection of frontier models and open-source models, LLMs and SLMs.
The company is set to offer the most capable and cost-effective SLM through the recently announced launch of Phi-3, which is currently in trial by companies like CallMiner, LTIMindtree, PwC and TCS.
Microsoft’s Models as a Service offering makes it easy for developers to use LLMs and SLMs without having to manage any underlying infrastructure. Hundreds of paid customers, from Accenture and EY to Schneider Electric, are using it to take advantage of API access to third-party models, including the latest from Cohere, Meta and Mistral.
As part of a partnership announced last week, G42 will run its AI applications and services on Microsoft’s cloud.
The number of Azure AI customers and average spend continue to grow. Microsoft witnessed an acceleration of revenues from migrations to Azure. Notably, Azure Arc continues to help customers like DICK’S Sporting Goods and World Bank streamline their cloud migrations. Arc now has 33,000 customers, up more than 2X year over year.
MSFT has become the hyperscale platform of choice for SAP and Oracle workloads, with Conduent and Medline moving their on-premises Oracle estates to Azure, and Kyndryl and L’Oreal migrating their SAP workloads to Azure.
The company is seeing an acceleration in the number of large Azure deals from leaders across industries, including billion-dollar-plus multi-year commitments announced recently from Cloud Software Group and The Coca-Cola Company.
In the fiscal third quarter, the number of 100 million dollar-plus Azure deals increased more than 80% year over year, while the number of 10 million dollar-plus deals more than doubled.
More than half of Azure AI customers also use the company’s data and analytics tools. Customers are building intelligent applications running on Azure PostgreSQL and Cosmos DB, with deep integrations with Azure AI.
MSFT is also encouraged by the momentum in its next-generation analytics platform, Microsoft Fabric. Fabric now has more than 11,000 paid customers, including leaders in every industry, from ABB, EDP and Energy Transfer to Equinor, Foot Locker, Itochu and Lumen.
Fabric is seamlessly integrated with Azure AI Studio, meaning customers can run models against enterprise data that is consolidated in Fabric’s multi-cloud data lake, OneLake. Power BI, which is also natively integrated with Fabric, provides business users with AI-powered insights. The company now has more than 350K paid customers.
Microsoft Witnesses Strong Copilot Adoption in Q3
GitHub Copilot is bending the productivity curve for developers. Microsoft now has 1.8 million paid subscribers, with growth accelerating to more than 35% quarter over quarter, and continues to see increased adoption from businesses in every industry, including Itaú, Lufthansa Systems, Nokia (NOK - Free Report) , Pinterest (PINS - Free Report) and Volvo (VLVLY - Free Report) Cars.
Copilot is driving growth across the broader GitHub platform too. AT&T, Citigroup and Honeywell increased their overall GitHub usage after seeing productivity and code quality increases with Copilot.
More than 90% of the Fortune 100 are now GitHub customers and revenues accelerated more than 45% year over year in the fiscal third quarter.
30,000 customers across every industry have used Copilot Studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter over quarter. Cineplex, for example, built a copilot for customer service agents, reducing query handling time from as much as 15 minutes to 30 seconds.
More than 330,000 organizations, including over half of the Fortune 100, have used AI-powered capabilities in Power Platform. Power Apps now have more than 25 million monthly active users, up over 40% year over year.
Copilot is now available to organizations of all types and sizes, from enterprises to small businesses. Nearly 60% of the Fortune 500 now use Copilot with accelerated adoption across industries and geographies, from companies like Amgen, BP, Cognizant, Koch Industries, Moody’s, Novo Nordisk, NVIDIA and Tech Mahindra purchasing more than 10,000 seats.
Microsoft is witnessing increased usage intensity from early adopters, including a nearly 50% increase in the number of Copilot-assisted interactions per user in Teams, bridging group activity with business process workflows and enterprise knowledge.
The company has added more than 150 Copilot capabilities since the beginning of the year. With Copilot in Dynamics 365, Microsoft is helping businesses transform every role and business function. Copilot for Service and Copilot for Sales are broadly available, helping customer service agents and sellers at companies like Land O’Lakes, Northern Trust, Rockwell Automation and Toyota Group generate role-specific insights and recommendations from across Dynamics 365 and Microsoft 365, as well as third-party platforms like Salesforce, ServiceNow and Zendesk.
Copilot for Finance is helping enterprises to reduce labor-intensive processes like collections and contract and invoice capture for companies like Dentsu and IDC. ISVs are also building their own Copilot integrations. For example, new integrations between Adobe Experience Cloud and Copilot will help marketers access campaign insights in the flow of their work.
When it comes to devices, Copilot in Windows is now available on nearly 225 million Windows 10 and Windows 11 PCs, up 2X quarter over quarter.
In healthcare, DAX Copilot is being used by more than 200 healthcare organizations, including Providence, Stanford Health Care and WellSpan Health.
Operating Results
Gross profit increased 18% year over year to $43.3 billion. The gross margin expanded 60 basis points (bps) to 70.1% on a year-over-year basis. Microsoft Cloud’s gross margin decreased slightly year over year to 72%.
Operating expenses rose 9.7% year over year to $15.77 billion, with 9 points from the Activision acquisition.
Operating income of $27.5 billion increased 23.4% (up 23% at cc). The operating margin expanded 230 bps on a year-over-year basis to 44.6%.
Productivity & Business Process operating income rose 17.4% to $10.14 billion, beating the Zacks Consensus Estimate by 0.21%.
Intelligent Cloud operating income increased 32% to $12.51 billion, beating the consensus mark by 7.45%.
More Personal Computing’s operating income increased 16.2% to $4.92 billion, which missed the consensus mark by 20.17%.
Balance Sheet & Cash Flow
As of Mar 31, 2024, Microsoft had total cash, cash equivalents and short-term investments balance of $80.02 billion compared with $81.01 billion as of Dec 31, 2023.
As of Mar 31, 2024, long-term debt (including the current portion) was $42.6 billion compared with $47.1 billion as of Dec 31, 2023.
Cash flow from operations was $31.9 billion, up 31%, driven by strong cloud billings and collections. Free cash flow was $21 billion, up 18% year over year, reflecting higher capital expenditures to support our cloud and AI offerings.
In the reported quarter, the company returned $8.4 billion to shareholders in the form of share repurchases and dividends payouts ($5.57 billion).
Guidance
For the fiscal fourth quarter, Microsoft expects the cost of revenues between $19.6 billion and $19.8 billion and operating expenses to grow in the $17.15-$17.25 billion range. Other income and expenses are expected to be roughly $(850) million.
The company expects revenue growth in the productivity and business processes segment between $19.9 billion and $20.2 billion.
MSFT expects Office 365 Commercial revenue growth to be roughly 14% at cc. Office Commercial products revenues are expected to decline in the mid-to-high teens.
In Office Consumer products and cloud services, Microsoft expects revenue growth in the low-to-mid single digits. For LinkedIn, the company expects revenue growth in the mid-to-high single digits. In Dynamics, MSFT expects revenue growth in the low-to-mid teens.
For Intelligent Cloud, Microsoft anticipates revenues between $28.4 billion and $28.7 billion.
In Azure, MSFT expects revenue growth at cc between 30% and 31%. In Enterprise Services, revenues are expected to decline mid-to-high single digits. The company expects Server revenue growth in the low-to-mid single digits.
For More Personal Computing, the company projects revenues between $15.2 billion and $15.6 billion. It expects Windows OEM revenues to grow in the low-to-mid single digits.
In Gaming, this Zacks Rank #3 (Hold) company expects revenue growth in the low-to-mid 40s. This includes roughly 50 points of net impact from the Activision acquisition. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Microsoft expects Xbox content and services revenue growth in the high 50s, driven by roughly 60 points of net impact from the Activision acquisition.