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Microsoft (MSFT -6%) is trading lower after reporting Q1 (Sep) results last night. The software giant returned to its pattern of double-digit EPS beats after breaking a string of five consecutive double-digit EPS beats last quarter. Revenue rose 16.0% yr/yr to $65.58 bln, which above analyst expectations. However, the Q2 (Dec) revenue guidance was a bit light of expectations.

• Let's start with Azure, which performed well but analysts seem a bit let down by the Q2 guidance. Azure grew +34% CC (constant currency), which was slightly above prior guidance of +33% CC. The better-than-expected result was due to the small benefit from in-period revenue recognition. MSFT is seeing continued growth in cloud migration. Azure saw healthy consumption trends that were in line with expectations. Azure growth included roughly 12 points from AI services, similar to last quarter.
• Azure demand continues to be higher than MSFT's available capacity. In its on-premises server business, revenue decreased 1% as MSFT saw lower-than-expected transactional purchasing ahead of the Windows Server 2025 launch. MSFT expects Azure Q2 (Dec) revenue growth to be +31-32% CC. MSFT expects the contribution from AI services to be similar to last quarter, given the continued capacity constraints, as well as some capacity that shifted out of Q2 and into H2.
• In Productivity and Business Processes, segment revs came in at $28.3 bln, which was above $27.75-28.05 bln prior guidance, driven by better-than-expected results across all businesses. M365 commercial cloud revenue increased 15% (+16% CC) with business trends that were as expected. LinkedIn revenue increased 10% (+9% CC), slightly ahead of expectations, with growth across all lines of business.
• Its More Personal Computing segment (Activision, Windows, Surface, Xbox) also performed well with revs of $13.2 bln vs $12.25-12.65 bln prior guidance. Results were above expectations, driven by Gaming and Search. MSFT saw rate expansion in addition to healthy volume growth in both Edge and Bing. And in gaming, revenue increased 43%. Results were ahead of expectation, driven by stronger-than-expected performance in both first- and third-party content as well as consoles.

In terms of why the stock is lower, we think the DecQ revs being a bit light is impacting the stock. Also, analysts seem a bit disappointed with the Azure guidance. However, MSFT is trying to build up capacity to meet strong AI demand, so there will be some variability. Another factor is that the stock has been trending higher since early August. As such, perhaps sentiment was running a bit on the high side.