Last week, Microsoft (Nasdaq: MSFT) announced its third quarter results that exceeded analyst estimates driven by its AI momentum. However, its weak outlook brought down the momentum in its share price.

Microsoft’s Financials

Microsoft’s third quarter revenues grew 17% to $61.86 billion, beating analyst estimates of $60.8 billion. EPS was $2.94, which was also ahead of the Street’s forecast of $2.82.

Microsoft’s Intelligent Cloud segment revenues grew 21% to $26.71 billion versus the estimate of $26.26 billion. Azure revenues grew 31%, ahead of the estimated 28.6%. 

Revenues from the Productivity and Business Processes unit, including Office productivity software, LinkedIn, and Dynamics, grew 12% to $19.57 billion, beating the Street’s forecast of $19.54 billion. 

Revenue from its More Personal Computing segment grew 18% to $15.58 billion, beating the analyst estimate of $15.08 billion. Growth was driven by 62% growth in Xbox content and services revenue, driven by 61 points of net impact from the $68.7 billion Activision acquisition.   

For the fourth quarter, Microsoft expects revenues of $64 billion while analysts expect $64.5 billion. The company expects revenue of $19.9-$20.2 billion or 9%-11% growth in Productivity and Business Processes, $28.4-$28.7 billion or 19%-20% growth in Intelligent Cloud, and $15.2 to $15.6 billion or 10%-13% growth in More Personal Computing in the fourth quarter.

Microsoft’s AI Offerings

Last quarter, Microsoft had disclosed that it has 53,000 Azure AI customers. Read more about our analysis of its AI platform strategy, which comprises Azure AI Studio, Azure Open AI Service, Azure AI Search, and Azure AI Bot Service. 

During the recent call, Microsoft CEO Satya Nadella talked about the adoption of its AI platform. Over 65% of the Fortune 500 use its Azure OpenAI service. Last week, it introduced Phi-3, a family of cost-effective, open AI small language models (SLMs) models developed by Microsoft. It’s already on trial by companies like CallMiner, LTIMindtree, PwC, and TCS. 

Microsoft’s GitHub Copilot code-generation AI chatbot now has 1.8 million paid subscribers. 90% of the Fortune 100 are GitHub customers and revenue accelerated over 45%. Copilot was originally introduced in 2023 as Bing Chat. Over 30K organizations across every industry have used Copilot studio.

This quarter, Cohere, Meta, and Mistral joined its roster of hundreds of paid customers using Microsoft Azure’s Models as a Service to leverage API access to third-party models. 

The number of $100M-plus Azure deals increased over 80% while the number of $10M-plus deals more than doubled. GenAI contributed 7% points to Azure’s growth, up from 6% last quarter. Analysts estimate Azure AI business to be over $4 billion in ARR.

Over half of its Azure AI customers use its data and analytics tools. Customers are building intelligent applications running on Azure, PostgreSQL, and Cosmos DB with deep integrations with Azure AI. 

Microsoft has also seen momentum for its analytics platform, Microsoft Fabric. Fabric now has over 11,000 paid customers. Fabric is seamlessly integrated with Azure AI Studio wherein customers can run models against enterprise data consolidated in OneLake, its multi-cloud data lake. Power BI, which is also natively integrated with Fabric, provides business users with AI-powered insights.

The company’s stock is trading at $397.84 with a market capitalization of $2.89 trillion. It hit a 52-week high of $430.82 last month prior to the results. It hit a 52-week low of $303.4 in May last year.

Disclosure: All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article.

Photo Credit: Tawanda Razika from Pixabay