Microsoft clocks another solid earnings quarter, but Azure's growth rate continues to slide

Microsoft is weaving AI into its entire technology stack as a means to differentiate it itself from competitors. (Microsoft)

Microsoft posted first quarter earnings that trounced analysts' expectations, but Azure's growth rate continued its slide.

On Wednesday, Microsoft report first quarter profit of $10.7 billion, or $1.38 per share, on revenue of $33.1 billion, both of which were an increase from $1.14 a share on sales of $29.08 billion in the same quarter a year ago. On average, analysts had projected earnings of $1.25 per share on revenue of $32.15 billion, according to FactSet. Microsoft had a year-over-year increase in revenue of 14%.

As it competes with Amazon Web Services (AWS), Microsoft's success has been driven by large gains in its cloud-computing services. Microsoft's cloud business includes Azure as well as cloud-based versions of Microsoft’s Office suite of software, but it doesn't break out specific revenue amounts for Azure like Amazon does with AWS.

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Microsoft said its "Intelligent Cloud" business revenue increased 27% to 10.8 billion, with revenue from server products and cloud services increasing 30%.  Azure's revenue grew to by 59%, but that was a decline from a growth rate of 76% a year ago. In the previous quarter, the revenue dropped to 64%. Some analysts had projected Azure's growth rate in the first quarter to be in the low 60s as a percentage.

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On the conference call, Microsoft CEO Satya Nadella highlighted his company's cloud partnerships with Oracle, VMware, and SAP, the latter of which was announced on Wednesday. In the first quarter, Microsoft opened new data center regions in Germany and Switzerland.

"Every Fortune 500 customer today is on a cloud migration journey, and we are making it faster and easier," Nadella said, according to a Seeking Alpha transcript. "Just this week, we announced an extensive go-to-market partnership with SAP, making Azure the preferred destination for every SAP customer, and our partnerships with VMware and Oracle also bring these ecosystems to our cloud.

"We’re extending beyond the cloud to the edge, enabling customers to get real-time insights where data is generated while ensuring security and privacy."

Nadella also said: "The quintessential characteristic of every application going forward will be AI." On that note, Azure AI now has more than 20,000 customers, and more than 85% of the Fortune 100 companies started using Azure AI over the past 12 months.

Microsoft CFO Amy Hood said AI is woven through every layer and component of the entire tech stack, and that the company will continue to invest in AI because of the differentiation it gives Microsoft over its competitors.

Microsoft said it expects second quarter revenue will be in the range of $35.15 billion to $35.95 billion. Hood said that Microsoft was sticking to its full-year forecast of double digit percentage revenue gains.

"At the company level, we continue to expect double-digit revenue and operating income growth, driven by continued momentum in our commercial business," Hood said. "Given our strong first quarter results and the expected sales mix for the remainder of the year, we now expect operating margins to be up slightly year-over-year, even as we continue to invest with significant ambition in high growth areas."

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