Microsoft's First Quarter Results: Artificial Intelligence and Cloud

Microsoft's First Quarter Expectations

Microsoft (MSFT) is set to announce its first quarter financial results later on Wednesday evening. This report will provide Wall Street with an opportunity to showcase the company's latest developments in artificial intelligence and cloud services.

These developments come the day after an updated agreement between Microsoft and OpenAI (OPAI.PVT). The new agreement allows OpenAI to continue its efforts to transform its non-profit side into a public benefit corporation. Now, Microsoft will hold a 27% stake in OpenAI Group PBC, which is valued at approximately 135 billion dollars, while OpenAI's non-profit arm will hold a stake valued at 130 billion dollars under this agreement.

Microsoft has invested billions into OpenAI. These investments have allowed OpenAI to improve its software and provide new capabilities to users through the Microsoft Azure platform. Thus, this process has contributed to Microsoft's revenues as well.

Initially, Microsoft was the sole cloud service provider for OpenAI; however, now both parties have agreed to allow OpenAI to leverage other cloud companies. This has enabled OpenAI to collaborate with Oracle (ORCL) to build Stargate Project data centers aimed at increasing efficiency.

Under the new agreement terms, while Microsoft has lost its first refusal right, OpenAI has pledged to spend 250 billion dollars for Azure usage.

According to Bloomberg consensus estimates, Microsoft's adjusted earnings for the first quarter are expected to be 3.68 dollars per share, with total revenue projected at 75.5 billion dollars. In the same period last year, these figures were recorded as 3.30 dollars and 65.6 billion dollars, respectively.

Analysts predict that commercial cloud revenue may rise to 48.6 billion dollars from 38.9 billion dollars. For Microsoft's Intelligent Cloud segment (including Azure), revenues are expected to be 30.2 billion dollars, showing a 25% increase compared to last year.

AI-related revenues from Azure are projected to rise from 12% to 18.7% in the first quarter of fiscal year 2025. Azure revenue is expected to increase by 37.4%; however, this would be a slight decrease compared to the 39% growth achieved by Microsoft in the fourth quarter.

UBS analyst Karl Keirstead viewed this situation positively in an investor note: "The risk/reward ratio looks positive for short-term Azure growth. The tone from enterprise customers and partners has improved, with major Azure partners reporting acceleration trends. Demand trends from OpenAI in particular look strong, and Microsoft is rolling out additional AI infrastructure capacities."

Microsoft is also expanding its AI offerings in consumer businesses. The company introduced Copilot+PC at the beginning of this year and added updates this month to provide voice command access to the Copilot AI chatbot on Windows 11. Additionally, Copilot is being integrated into Xbox gaming applications.

However, Futurum research director Olivier Blanchard notes that Microsoft's AI implementation is somewhat confusing: "Copilot+ has mixed feelings regarding the uncertainty around the launch of the AI category and the confusion around the Copilot brand. The adoption of Windows 11 looks good, but I would like to see Microsoft provide more clarity and tighter execution around the Copilot and Copilot+ ecosystems."