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Microsoft earnings are ‘better than feared’ amid tech sector trends: Analyst

RBC Capital Markets Software Equity Analyst Rishi Jaluria joins Yahoo Finance Live to break down Microsoft's latest earnings report, the tech company's investment into the ChatGPT A.I., hiring across Microsoft's units, and the outlook of its deal with Activision.

Video transcript

- Take a look at shares of Microsoft. They're up just about 4% here in extended trading following their second quarter results. EPS coming in better than expected, adjusted EPS $2.32. The estimate was for $2.30. Revenue, a slight miss there. But I think a lot of this excitement is about that intelligent cloud business. Revenue, they're coming in better than what the Street was looking for-- $21.51 billion. That's a growth of about 18%, 24% in constant currency.

Let's talk about this with Rishi Jaluria. He is RBC Capital Markets software equity analyst joining us now. Rishi, it's great to see you here. So first, I know you've only had a couple of minutes here to dig through this report. But what are your-- what's your first reaction?

RISHI JALURIA: Yeah, and I thank you so much for having me. Look, I think this was better than people feared. I know there was a lot of negativity as I've been talking to investors about Azure slowdown, about cloud saturation. And that just hasn't happened, right?

I mean, the Azure number on a constant currency basis actually came in a point ahead of guidance when I think people were expecting a miss. Office is looking a little bit more resilient than I think we expected in spite of all the headlines we've seen about layoffs and hiring slowdowns. And so all in, I would say better than feared. And, you know, let's see how Satya and Amy guide on the call. But it's good to see an Azure number like this that isn't as bad as people were worrying.

- The stock up about 5% after hours. Is that what you would expect?

RISHI JALURIA: Yeah, yeah, this feels like a little bit of a relief rally. You know, again, if you look at the action of the stock price heading into earnings, you know, it definitely felt like there was a decent amount of fear embedded in there. And, you know, I think Microsoft is, at least so far in the preliminary numbers, showing a level of resilience higher than people expected.

- Rishi, when you take a look at AI, clearly, it's a top priority. It's written in this earnings release. Satya Nadella being quoted as saying, "The next major wave of computing is being born." He went on to say, "We are committed to helping our customers use our platforms and tools to do more with less today and innovate for the future in this new era of AI."

Clearly, they have a huge bet on AI, the recent multibillion dollar investment into ChatGPT OpenAI. What do you make of that and the competitive advantage this could potentially give Microsoft in AI?

RISHI JALURIA: Yeah, absolutely. Look, I think the greatest thing that we've seen out of ChatGPT and OpenAI is really consumerization and productizing artificial intelligence. And we look at OpenAI and Microsoft's investment there as being a call option on the stock. Honestly, it feels like there is a lot of room here. And I don't want to exaggerate.

Artificial intelligence is the third big wave in technology in my lifetime, right? The first was the internet. The second was cloud computing. And now, artificial intelligence is going to be the third one.

And I see so much room throughout Microsoft's portfolio to integrate OpenAI and ChatGPT through everything from Bing search to GitHub copilot to make it easier for developers to write code to even integrating it in Office to make productivity a lot easier. The-- really, the sky's the limit in terms of where they can, you know, bring OpenAI technology throughout their portfolio. And I do think it will be a competitive advantage for their portfolio of products.

- That echoes something Satya Nadella said earlier in terms of the magnitude of ChatGPT. One of the big stories other than that was, of course, the layoffs-- 10,000. Took a $1.2 billion charge. Do you expect more of that this year?

RISHI JALURIA: I nod at Microsoft. I expect that at other software companies. But Microsoft has always been very, very profitable. And look, it's really unfortunate that they did have to do RIFs. They did grow headcount by more than revenue over the past couple of years. But it feels like for Microsoft, this might be a one-and-done scenario unless the macro significantly gets worse.

And what I think is really important with Microsoft's layoffs is they're still hiring in key areas. It's not a, we're cutting headcount and not hiring anymore. They're still hiring in Azure and security and a lot of other areas. And so it really feels to me like Microsoft will continue to hire, will continue to invest. And yeah, I don't expect another big round of layoffs.

- Rishi, Microsoft was the first big tech name to report this earnings season. Clearly, we're seeing the Street's reaction. Very excited about this report. What do you think these signals-- or does this signal anything about what we could hear in the coming weeks from some of the other big players there?

RISHI JALURIA: Yeah, look, I think it's signaling to me that a lot of other enterprise software companies may come up with a quarter that is better than people fear. You know, in our own checks, we've heard that Q4-- you know, calendar record Q4 was better than expected for a lot of companies. Again, I think it comes down to the guidance. But if the guidance comes in in line with expectations, I think that's enough. And so yeah, given all the fears people had about tech and layoffs and everything, I do think this bodes well for a lot of other enterprise software companies.

- How big a drag race she is gaming? And do you believe this Activision deal will ever close?

RISHI JALURIA: I do. I think-- look, gaming is-- it's a little weak right now as we know, just with the delay of AAA titles and tough compares and all that. But ultimately, I think gaming is very strategic to Microsoft, especially if you think about Game Pass and the opportunity there to become the Netflix of gaming.

And I think Activision is a critical part of that. I think Microsoft has played the antitrust game very well. I do think the deal still goes through likely with guardrails around it, something like all Activision titles cannot be Xbox exclusives for the next 10 years, not just "Call of Duty" but any future titles get developed. And I think Microsoft is going to be willing to make those concessions because Activision is really important to that long-term vision on gaming.

- And, Rishi, earnings call about to get underway. What do you want to hear from Microsoft?

RISHI JALURIA: Yeah, I want to hear that-- you know, ultimately we're not out of saturation point of migration to the cloud, that there's still a lot of migration to the cloud left to be done, especially in traditional non tech industries, that there's still a lot of runway for growth, and that Microsoft is very seriously thinking about ways to start productizing and monetizing this investment in OpenAI. That's what I'm really looking forward to on the call.

- All right, an optimistic take there. Rishi Jaluria, RBC Capital Market Software Equity analyst. Thank you, sir. Appreciate that.