Why Microsoft's earnings are all about 'surviving and advancing'

By Emily Bary

Big AI gains could be ahead for Microsoft, but Thursday afternoon's earnings may illustrate a more gradual ramp

Microsoft Corp. is certainly benefitting from artificial intelligence, but not to the degree of Nvidia Corp.

That's according to Melius Research analyst Ben Reitzes, who wrote recently that the March quarter was likely a "tweener" for many large technology companies like Microsoft (MSFT). In other words, it was the quarter before the more important ones were to really begin.

"Even for Microsoft - it is about surviving and advancing," Reitzes wrote. Investors will be looking for hints about how future AI spending from customers could pan out.

Reitzes added that investors shouldn't be shocked "to see Copilot revenue talked down" when Microsoft posts its fiscal third-quarter results on Thursday afternoon. He was referring to Microsoft's AI software enhancements.

"We think sales are ok and interest is high but don't expect any miracles here," he added.

See also: Microsoft earnings later this week could bring 'upside across the board'

Evercore ISI's Kirk Materne seemed slightly more bullish about Copilot sentiment in the field, though he agreed the features would have more of a monetary impact later this calendar year and into next year.

"Interest in Copilot remains extremely high and the question is when, not if, adoption will start to ramp materially," he wrote.

Read: Microsoft's AI advantage is so critical it can't be quantified, analyst says

Jefferies analyst Brent Thill also expects Microsoft to capitalize on AI but said that wave will take some time to build.

"Generally, we expect a gradual adoption to ramp," he wrote, with that starting in the second half of this calendar year before delivering a more meaningful revenue uplift next year on the back of growing adoption.

Microsoft's AI story comes in multiple parts. While analysts think Copilot gains won't be immediate, they've seemed more upbeat about the potential for AI to help Microsoft's Azure cloud-computing business, as has been the case in recent quarters.

AI services contributed 6 percentage ponts to Azure's growth in the December quarter, up from 3 points in the September period. Thill thinks investors might be expecting 10 points of AI contributions this time around.

"Our checks continued to indicate improving consumption trends, especially for Azure due to AI," he wrote.

Microsoft's outlook called for similar overall Azure growth in the March quarter to what was seen in the December quarter, and that was a 28% expansion on a constant-currency basis. While consensus expectations are for 28.5% growth in constant currency, Thill said investor expectations could be in the 29% to 30% range.

Microsoft earnings: What to expect from Azure, Copilot, Office - and the stock

On the whole, analysts are looking for $2.82 in adjusted earnings per share from Microsoft, up from $2.45 a year before. And the FactSet consensus calls for $60.9 billion in total revenue, up from $52.9 billion a year before.

Microsoft earnings have the potential to help a software sector that's gotten off to a sluggish start so far this year. While Microsoft shares are up about 9% in 2024 to date, the iShares Expanded Tech Software ETF IGV is essentially flat.

"If we are right and [Microsoft] outperforms expectations, it could provide a welcome lift to the software sector, though we continue to believe material IT spend acceleration in [the second half of 2024] is unlikely," Guggenheim analyst John DiFucci wrote.

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-Emily Bary

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04-25-24 0909ET

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