Microsoft’s Q1 earnings preview: Resilience expected to be the story

A broad consensus exists that the upcoming results will reflect a continued recovery in both Microsoft's top and bottom lines, consistent with the trend over the past two quarters.

When does Microsoft Corp report earnings?

Microsoft Corp is set to release its first-quarter (Q1) financial results on Wednesay, 25 October 2023 at 7.00 am AEDT, after the market closes.

Microsoft's earnings – what to expect

A broad consensus exists that the upcoming results will reflect a continued recovery in both Microsoft's top and bottom lines, consistent with the trend over the past two quarters. Current expectations are for Microsoft's Q1 2024 revenue to increase by 8.7% year-on-year to US$54.48 billion.

Historical performance

Historically, Microsoft has a strong track record of exceeding market expectations. It has beaten top-line estimates on 17 out of 20 previous occasions, while earnings have only fallen short of expectations once (Q4 2022) over the past 20 quarters.

Microsoft's historical performance chart

Cloud and PC market outlook

Intelligent Cloud segment: a closer look

Year-on-year growth for Microsoft's Intelligent Cloud segment has been experiencing a slowdown over the past five quarters. The momentum has moderated from its initial growth of over 25% to 14.8% in the previous quarter. This segment has been the crown jewel in Microsoft's portfolio, serving as its highest-growth division and accounting for 43% of the overall revenue.

Upcoming Q1 2024 expectations for the Cloud Segment

For the upcoming Q1 2024 results, expectations are set for a return to stronger growth—estimated at 15.5% compared to the previous 14.8%. Any positive validation from these numbers is likely to fuel optimism for an improving growth trend going forward. This would also reflect resilience in corporate digital transformation efforts, despite uncertain economic conditions.

Personal computing segment: challenges and outlook

Conversely, weak consumer demand for personal computers (PCs) may continue to be a hindrance to the recovery of Microsoft's Personal Computing business. The segment is expected to report its fourth consecutive quarter of year-on-year contraction, estimated at -3.7%.

However, with subdued expectations already factored in, forward-looking statements could play a significant role in shaping market sentiment. According to projections from the International Data Corporation (IDC), global PC shipments are expected to return to growth in 2024, leaving room for any positive surprises in the coming quarters.

Microsoft's revenue breakdown chart

Future growth opportunities and key focus areas

Activision blizzard acquisition and gaming outlook

Microsoft has recently received the green light for its US$69 billion acquisition of Activision Blizzard, which will significantly bolster the company's presence in the gaming industry. While any uptick in its gaming revenue won't be reflected in the upcoming results, investors will be keenly observing any forward-looking guidance on synergies with its Game Pass subscription service. This is in line with the company's strategy of focusing on player engagement over console sales.

AI investments and Microsoft 365 Suite

Furthermore, the company's AI-driven product portfolio will be under scrutiny as it leverages its first-mover advantage in generative AI with a substantial investment in OpenAI this year (US$10 billion). Microsoft is currently in the process of rolling out its Microsoft 365 AI subscription service, Copilot, with greater visibility on its adoption expected to be revealed in the coming quarters.

The extensive user base of 345 million for its Microsoft 365 suite and the dominance of its 365 products in the market (over 50% market share for office productivity software) may offer ample room for monetisation. It could be only a matter of time before these developments positively impact the company's top and bottom lines.

Microsoft technical analysis – eyes on overcoming cloud resistance

A bullish divergence displayed on Moving Average Convergence/Divergence (MACD) on the daily chart has led to an over 8% recovery in Microsoft's share price since the start of the month, as buyers are now attempting to defend its 100-day moving average (MA).

The broader upward trend may remain intact for now, with its weekly Relative Strength Index (RSI) successfully bouncing off the key 50 level over the past month—the midline that separates the bullish and bearish territories.

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