Microsoft Corp. delivered a solid fiscal first quarter earnings beat today, but its stock was moving lower after its guidance revealed slower-than-expected growth over the next quarter.

The company reported earnings before certain costs such as stock compensation of $3.30 per share, comfortably ahead of Wall Street’s target of $3.10 per share, while revenue jumped 16% from a year earlier, to $65.59 billion, ahead of the $64.51 billion consensus estimate.

All told, Microsoft reported net income of $24.67 billion for the quarter, up 11% from a year earlier.

The numbers were impressive, but the company’s forecast for the current quarter was less so. Looking ahead, officials called for revenue of between $68.1 billion and $69.1 billion, below the Street’s forecast of $69.83 billion.

Officials blamed the lower forecast on data center infrastructure suppliers, saying late deliveries of equipment mean the company won’t be able to meet its expected demand in the second quarter. However, the company indicated that the delays are only going to be a short-term issue.

“I feel pretty good that going into the second half of this fiscal year, some of the supply-demand will match up,” Chief Executive Satya Nadella (pictured) said on a call with analysts.

Today’s report is the first to come after Microsoft announced it would be making some changes to the way it reports its financials. In August, the company said the accounting changes are meant to align Azure better with consumption revenue, similar to how cloud infrastructure industry leader Amazon Web Services Inc. reports its consumption metrics.

As part of the changes, Microsoft said it will remove certain mature, slower-growth revenue streams, increasing the revenue growth rates for Azure. The changes also have the effect of increasing the artificial intelligence services contribution to Azure’s bottom line.

The company reported that sales from productivity and business processes in the quarter increased 12% from a year earlier, to $28.32 billion, ahead of the $27.9 billion consensus estimate.

With the accounting changes, Microsoft’s Azure and other cloud services revenue growth metric excluded sales from its mobility, security and Power BI data analytics tools, providing a clearer picture of Azure consumption. The company said Azure’s revenue grew by 33% in real terms, and 34% at constant currency, with 12% of that coming from AI services.

The Street had forecast Azure revenue growth of just 29.4%. That’s noticeably slower than the 35% annual growth of Google Cloud, as reported by Alphabet Inc. yesterday. AWS, which leads the cloud infrastructure market, will report its latest results tomorrow.

Microsoft Chief Financial Officer Amy Hood told analysts on the call that “demand continues to be higher than our available capacity.”

Elsewhere, the full intelligent cloud segment, which includes sales from Azure, Windows Server and enterprise services, delivered $24.09 billion in revenue, up 20% from a year ago and above the Street’s consensus of $24.04 billion.

Microsoft’s More Personal Computing segment is now smaller as a result of the accounting changes, but it still managed to grow 17%, to $13.18 billion, coming in ahead of the Street’s forecast of $12.56 billion. Within that segment, sales of devices and Windows operating system licenses to device makers rose 2% from a year earlier, despite quarterly PC shipments declining by 1.3% during the quarter, according to the latest data from Gartner Inc.

Constellation Research Inc. analyst Holger Mueller praised Microsoft for delivering a “very strong quarter”, where even the traditionally sluggish Windows segment managed to deliver growth above inflation.

“The major risk for Microsoft, as we saw on the earnings call, is that the company faces a risk of being supply-chain constrained,” the analyst said. “Microsoft will need to find a way to address this challenge going forward and make sure its suppliers can fulfill their obligations. If not, its cloud revenue engine might begin to stutter, and that is not what investors want to see.”

Analysts sharpen their focus on AI

During the quarter, Microsoft continued to invest billions of dollars into its AI efforts, ramping up spending to build out its infrastructure so it can handle increasingly more powerful workloads on behalf of its customers. It also invested billions more into OpenAI, the creator of ChatGPT, which recently closed on a $6.6 billion round of funding, taking its valuation to more than $157 billion.

Despite its ongoing investments in AI, it’s actually tough to gauge how much revenue Microsoft is generating as a result of those endeavors. The bulk of its AI revenue comes via its cloud infrastructure services, but it’s not broken out separately. In addition. the company has infused products such as Microsoft 365 and Bing with generative AI capabilities. However, it’s thought that the revenue from its AI software products is relatively small. The company hasn’t broken out sales from Copilot, its AI assistant technology that costs $30 per person.

Investors are hopeful Microsoft will start shedding more light on the kind of demand it’s seeing for the Copilot tools, but there are suspicions that it’s not doing as well as the company had hoped.

“There’s been a little disappointment around Office Copilot relative to the promise and price,” Rishi Jaluria, an analyst with RBC Capital, told the Wall Street Journal. “The product isn’t necessarily there.”

Microsoft also has yet to reveal its hand in what many analysts feel will be the next big thing in the AI industry, so-called “agentic AI,” or AI agents that go beyond chatbots like ChatGPT and actually take a series of actions on behalf of their users.

Valoir Research analyst Rebecca Wettemann told SiliconANGLE that Microsoft has lost ground in this area, with the likes of Salesforce Inc.. Oracle Corp. and ServiceNow Inc. all beating it to market with their autonomous AI technology. So whatever Microsoft comes up with is “going to have to be extremely compelling, both in terms of time to deploy and accuracy,” she said.

The analyst said Microsoft will most probably look to gain traction in agentic AI by forging partnerships and alliances with enterprise vendors in areas like human capital and talent management, similar to how Workday Inc. has partnered with Salesforce. It will also need to come up with a new pricing model, as agentic AI doesn’t fit with the per-user pricing that it uses with services like Copilot, she said.

“Microsoft will face increasing price pressure for Copilot,” Wettemann added. “As more and more enterprise software vendors follow Oracle’s approach of bundling in AI capabilities as part of the overall software license and delivering AI grounded in data within enterprise applications, customers are going to push back more on standalone AI pricing and standalone copilots.”

Microsoft’s stock was down more than 3% in the after-hours trading session. Prior to Wednesday’s close, the stock had gained about 15% in the year to date, while the Nasdaq is up 24% in the same period.

Photo: Microsoft/livestream