Story Stocks^®

Microsoft (MSFT +9%) is making a big move higher following its bullish Q3 (Mar) report last night. The software giant posted it largest EPS beat in the last six quarters. Revenue rose a robust 13.3% yr/yr to $70.07 bln, which was better than expected and was a milestone by topping $70 bln for the first time ever. MSFT also guided Q4 (Jun) revs above expectations. All three segments performed better than expected, but Azure was the star of the show.

• Let's start with Azure, which grew +35% CC (constant currency), well above prior guidance of +31-32% CC after coming in at the low end of guidance in Q2. Azure AI services brought capacity online faster than expected. However, the real outperformance in Azure in Q3 was its non-AI business. The non-AI side had execution challenges in Q2, but turned that around in Q3.
• Not only did Azure outperform in Q3, but Azure's Q4 (Jun) guidance of +34-35% CC was also ahead of street estimates, driven by strong demand. In non-AI services, MSFT expects continued healthy growth. And in AI services, while the company continues to bring data center capacity online as planned, demand is growing a bit faster. Therefore, MSFT now expects to have some AI capacity constraints beyond June.
• Its two other segments, Productivity and Business Processes and More Personal Computing also came in ahead of prior guidance. PBP was driven by LinkedIn, Microsoft 365 Commercial products, and Microsoft 365 Consumer. However, the Talent Solutions business continues to be impacted by weakness in the hiring market. MPC had better than expected results across all businesses.
• In terms of the upside Q4 guidance, MSFT said that, through April, demand signals across its Commercial businesses as well as in LinkedIn, Gaming and Search have remained consistent. In Windows OEM, MSFT assumes the elevated inventory levels from Q3 will come down in Q4. As a result, MSFT has widened its guidance range in MPC to account for some of this variability. On a final note, with the weakening of the US dollar, MSFT now expects an FX tailwind of 1 pt, it has usually been a headwind.

Overall, this was a great bounce back quarter for MSFT following weakish DecQ results. The Azure result and guidance were the real standout metrics. It is rare to see a 3 pt upside with Azure. Also, the guidance should put fears to rest about clients pulling back on cloud deployments. The Azure numbers are also great news for Amazon (AMZN) and its AWS segment, which reports tonight.