Microsoft (MSFT) delivered a strong performance in its September quarter, with Azure revenue growing 48% in constant currency, surpassing both its own guidance and Wall Street's expectations. The cloud division generated $33.2 billion in revenue, $1 billion above the $32.2 billion consensus, while overall revenue hit $92.3 billion, well above the top end of guidance. Adjusted earnings per share of $4.89 beat the $4.72–4.73 forecast, and operating margins reached 49.8%. The stock surged after hours, despite a weak day for tech stocks overall.
However, key metrics under the radar suggest potential challenges. Commercial bookings declined 12% year-over-year, and the $677 billion backlog remained unchanged from the previous quarter. Analysts had warned that the market's high expectations for Azure growth could be difficult to sustain without a guidance increase. With Amy Hood set to provide December-quarter guidance, the focus will shift to whether Microsoft can maintain its momentum.
While Azure growth accelerated to 48% from 39% a year ago, not all areas of the business saw improvement. Windows OEM and devices revenue dropped 22%, and M365 commercial seat growth slowed to 5% from 7%. However, M365 Commercial Cloud adjusted growth increased to 19% from 16%, driven by higher ARPU from premium offerings and increased consumption-based revenue. Meanwhile, M365 Consumer Cloud growth decelerated to 16% from 22%, raising concerns about the long-term impact of reduced seat sales.
The backlog, a key indicator for the cloud business, failed to grow sequentially, indicating that Microsoft is converting backlog into revenue faster than it is replenishing it. This could be a sign of strain on future growth unless new contracts pick up. Additionally, free cash flow fell 27% year-over-year to $18.6 billion, despite a 19% revenue increase, highlighting the pressure on cash flow amid rising capital expenditures. The company also repaid $4.85 billion in debt without issuing new bonds, keeping it out of the debt market Meta recently fled.
Looking ahead, Goldman analysts are closely watching Microsoft's capital expenditure plans for fiscal 2028, with estimates reaching $319 billion, well above the Street's $252 billion. The company's off-balance sheet leases, which have surged to $329.1 billion, could further impact its financial outlook. As Microsoft navigates these challenges, the focus will remain on whether it can sustain its Azure growth and maintain its financial health in the coming quarters.