How much did Azure growth exceed expectations?

  • In Microsoft’s first quarter of fiscal 2027, Azure revenue grew 48% year over year at constant currency, accelerating by 6 percentage points from the previous quarter. It exceeded the company’s prior guidance of 44%–45% and was approximately 3 percentage points above the market consensus.
  • Revenue from Agents & Infra, which includes Azure, was 76.8 billion dollars, up 25% year over year at constant currency and accelerating by 3 percentage points from the previous quarter. Revenue was 1.6% above the market consensus and also exceeded the company’s prior guidance of 75.15 billion–75.75 billion dollars.

Why did seat growth slow as M365 revenue accelerated?

  • M365 commercial cloud revenue grew 19% year over year at constant currency, above 15% in the previous quarter and approximately 2.1 percentage points above the market consensus.
  • Citi attributed the growth to higher average revenue per user from Copilot, E5/E7 and GitHub Copilot. However, M365 commercial seat growth slowed to 5% from 7% in the previous quarter, with this quarter’s revenue acceleration reflecting higher revenue per user to a greater extent.

How did revenue growth translate into profitability?

  • Microsoft’s cloud gross margin rose by 1 percentage points from the previous quarter, and the amount of cost of sales was in line with company guidance. Operating expenses and capital expenditure were both below Citi’s forecasts, driving earnings per share significantly above expectations.
  • Citi noted that AI capacity building is driving a sharp increase in capital expenditure; if AI adoption is slower than expected, the higher investment could harm the long-term performance trajectory.

What were the weaknesses in the consumer business, and what was Citi’s assessment?

  • Devices and Consumer revenue was 15.5 billion dollars, down 3% year over year at constant currency but 3.2% above the market consensus. Windows OEM and devices revenue fell 22% year over year; the company attributed this to the prior-year demand base created by the end of support for Windows 10, inventory reductions by OEMs and channels, and weak PC demand.
  • The consumer business’s outperformance came mainly from 12% growth in search and advertising revenue excluding traffic acquisition costs, and a narrowing of the constant-currency decline in Xbox content and services revenue to 1% from 10% in the previous quarter.
  • Citi assigned Microsoft a Buy rating and a 636-dollar price target, and expects second-quarter fiscal guidance to exceed the market consensus. The target is based on its fiscal 2029 earnings-per-share forecast of 30.16 dollars and a price-to-earnings multiple of approximately 23, discounted at an equity cost of approximately 12%.