Microsoft’s Q1 FY2025 Results: Here’s What Investors Should Know

TradingKey - In the US, Big Tech has been gearing up to report their latest numbers as earnings season kicks into gear. For a lot of the large cloud companies, investors have been watching out for how the Artificial Intelligence (AI) story plays out.

One of the largest cloud companies in the world – Microsoft Corporation (NASDAQ: MSFT) – reported its Q1 FY2025 earnings (for the three months ending 30 September 2024) on Wednesday (30 October) after the market closed.

Here’s what investors and those interested in AI should know about this tech giant’s latest numbers.

Revenue up 16% but guidance falls short

In terms of Q1 FY2025, Microsoft posted revenue of US$65.69 billion, up 16% year-on-year, and this came in ahead of consensus expectations of US$64.51 billion. Meanwhile, earnings per share (EPS) of US$3.30 beat estimates of US$3.10.

However, Microsoft guided for revenue in the current quarter (Q2 FY2025) of between US$68.1 billion and US$69.1 billion – representing 10.6% year-on-year growth at the midpoint of the range. This slightly disappointed investors given the current revenue growth rates that Microsoft has been posting.

In terms of the three business divisions – Productivity and Business Processes, Intelligent Cloud, and More Personal Computing – there was growth across the board. 

Microsoft’s closely-watched Azure cloud service posted 34% revenue growth during Q1 FY2025 but management’s guidance of 31% to 32% growth for Azure in Q2 FY2025 provided an outlook that suggested a deceleration in growth for the critical service.

Demand outstrips supply, costs rise

That relatively downbeat outlook for Azure matched up with management comments that said some of the data centre capacity – for AI expansion – Microsoft had been expecting didn’t materialise during Q1 FY2025. 

As a result, the company doesn’t expect to meet the demand from clients in Q2 FY2025 given the supply constraints it’s facing on the data centre front. Clearly, that’s going tol constrain the potential growth of Azure for the current quarter.

However, on the earnings call CEO Satya Nadella did clarify that “I feel pretty good that going into the second half of even this fiscal year, that some of that supply-demand will match up”.

Microsoft sales and spending both rise in Q1 FY2025 (US$ billions)

Sources: Bloomberg, company filings

On the costs side, capital expenditure (capex) for Microsoft hit a record high of US$14.9 billion and that was up 50% from a year earlier – far outpacing its growth rate in revenue over the past year. 

That capex figure has shot up in recent years for the company and has investors worried over when Microsoft will start seeing a significant return on its sizeable investments. 

AI revenue expected to hit US$10 billion

For Microsoft, its AI-related revenue comes from cloud services and its AI-enhanced productivity assistants that are embedded into office (like Copilot+). Management attributed 12 percentage points of Azure’s growth during Q1 FY2025 to AI – up slightly from the 11 percentage points contribution in Q4 FY2024.

Meanwhile, Microsoft attempted to reassure investors on AI as it expects revenue from its AI-related businesses to bring in more than US$10 billion over the course of a year by sometime in the next quarter, according to CEO Nadella.

While the company has been a big believer in the AI theme, it’s recently underperformed other tech stocks on its sizeable spending plans and the lack of large revenue gains from AI. However, this could materialise over the medium to long term.

Microsoft shares fell 3.7% in after-hours trading, following the results call, on the downbeat short-term outlook while the stock’s year-to-date gain of 16.6% is trailing the S&P 500 Index’s 22.6% rise over the same period.