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Microsoft (MSFT +3%) is trading higher after posting an impressive Q3 (Mar) report last night. The software giant reported its fifth consecutive double-digit EPS beat with nice revenue upside. The Q4 (Jun) revenue guidance was generally in-line, maybe a bit light. This was Microsoft's first full quarter to include its recent Activision Blizzard acquisition.

• Let's start with Azure, which was the star of the show. Azure grew +31% CC (constant currency), which was above prior guidance of +28% CC. Not only was it above guidance, but Azure had been settling in the high-20s in recent quarters. It was nice to see Azure break back above 30% CC growth despite a larger base. What's more, the Q4 (Jun) guidance was impressive as well at +30-31% CC.
• Importantly, Microsoft is seeing an acceleration in the number of large Azure deals, including some $1+ bln multi-year commitments. The number of $100+ mln Azure deals increased over 80% yr/yr, while the number of $10+ mln deals more than doubled. A key driver has been AI adoption. Customers use its Azure platforms/tools to build their own AI systems. MSFT says it offers the most diverse selection of AI accelerators, including the latest from NVIDIA, AMD and its own first-party silicon.
• More generally, Microsoft's PBP and Intelligent Cloud segments both reported revenue above the high end of guidance while its MPC segment was at the high end of guidance. In its commercial business, bookings increased 31% CC, significantly ahead of expectations driven by Azure commitments with an increase in average deal size and deal length. In its consumer business, PC market demand was slightly better than expected, benefiting Windows OEM, while ad spend was in-line. In Gaming, MSFT saw better-than-expected performance of Activision titles, benefiting Xbox content and services. Surface demand was slightly lower than expected.
• An area to watch in coming quarters is cap-ex spend and its impact on margins. On the call, MSFT said it expects cap-ex spending will increase materially on a sequential basis in Q4 (Jun) and that FY25 cap-ex spend will be higher than FY24 spend. This will be driven by cloud and AI infrastructure investments. The company is scaling up to meet growing demand for its cloud and AI products. MSFT expects FY25 op margins will be down only about 1 pt yr/yr, even with its significant cloud and AI investments.

Overall, this was another impressive quarter for MSFT. All of its segments performed well, but Azure was the star of the show yet again. We think Azure's performance and its acceleration in the number of large deals bodes well for Amazon's (AMZN) AWS segment, set to report next week (Apr 30). We are not seeing a big reaction in the stock today despite it pulling back in recent weeks. However, the stock is up significantly (+30% since early Oct) in recent months and rising rates have caused some jitters recently in mega tech names. Also, the higher cap-ex spend and its impact on margins may be worrying investors a bit.