Microsoft's (MSFT) fiscal fourth quarter earnings revealed a sequential decline in Azure cloud revenue growth, overshadowing quarterly profits and revenues that topped Wall Street's estimates.
Shares of Microsoft fell as much as 4% in after-hours trading Tuesday night as the tech giant reported Azure and other cloud services revenue growth of 26% year over year for the fourth quarter, down 1 percentage point from the quarter prior. Azure growth has declined sequentially every quarter since at least Q3 2022 and remains in investor focus as companies trim capital expenses amid rising interest rates.
During a call with investors, Microsoft projected Azure growth between 25% and 26% for the current quarter. When asked directly if the sequential drop in Azure revenue growth had "bottomed," Microsoft management didn't provide a clear guide.
"[It is] still early innings of the cloud migration itself, so there's a lot there still," Microsoft CEO Satya Nadella said during the company's earnings call. "And then on top of that, there's this complete new world of AI driving a set of new workloads ... We do think that this is a business that can have sustained high growth, which is something that, we are excited about."
For the fourth quarter, Microsoft's overall revenue rose 8% to $56.2 billion. Wall Street analysts had expected $55.5 billion. Meanwhile, net income for the quarter rose 20% to $20.1 billion, or $2.69 per share. Analysts were expecting $2.55 a share.
By segment, Productivity and Business Processes revenue increased 10% to $18.29 billion, above estimates for $18.1 billion. More Personal Computing revenue decreased by 4% to $13.9 billion but still came in higher than estimates for $13.58 billion. Intelligent Cloud revenue, which is led by Azure, was up 15% in the quarter to $24 billion against projections for $23.8 billion.
For the fiscal year 2023, Microsoft's revenue increased by 7%, the lowest rate of annual growth since 2017.
"A lot of people were looking for a higher (Azure growth) number, you know deliver on Gen AI, on loads of Gen AI," Ted Mortonson, Baird technology desk sector strategist told Yahoo Finance Live. "It’s very obvious that the enterprise now is still in this optimization stage of looking at their cloud spend. So that’s a little bit disappointing. People were looking at a higher number there."
Microsoft stock had rallied into the report, rising more than 43% this year amid growing artificial intelligence hype in the tech sector. The Redmond, Washington-based tech company has been at the forefront of the AI conversation since announcing a $10 billion investment in the ChatGPT creator, OpenAI, in January. Microsoft has integrated AI into its Bing search product and most recently announced pricing for its new AI product that will integrate into Microsoft 365 products.
The product, dubbed Copilot, is said to be able to summarize users' unread emails, reformat PowerPoint bullets, and write drafts based on outlines on demand, among other functions. Wall Street was bullish on the product's $30 per month pricing, with several analysts boosting their price targets on the stock after the news.
However, during Tuesday night's call, Microsoft management tempered expectations on when Copilot might meaningfully contribute to revenue.
"With strong demand and a leadership position, growth from our AI services will be gradual as Azure AI scales and our Copilots reach general availability dates," Microsoft CFO Amy Hood said on the earnings call. "So for FY'24, the impact will be weighted towards [the second half of the 2024 fiscal year]."
Microsoft's pending acquisition of Activision Blizzard was mentioned sparingly during Tuesday night's call. Management noted the acquisition was not factored into the 2024 outlook.
"We continue to work through the regulatory approval process and remain confident about getting the deal done," Nadella said. "We are committed to bringing more games to more players everywhere. Great content is key to our approach and our pipeline has never been stronger."
Josh Schafer is a reporter for Yahoo Finance.
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