Going into its investor’s earnings call later today, Microsoft will undoubtedly get questions about the specifics of its AI investments, but the broader picture has already been painted as a net positive for the company as it reports better-than-expected returns.
Admittedly, Microsoft is adept at playing three card monte when it comes to shuffling around business reporting, but for the time being, its AI investments reside in its Intelligent Cloud sector that recorded $26.7 billion in revenue equalling to a 21 percent increase year over year.
AI wasn’t the only bright spot in Microsoft’s earnings with the company reporting $61.9 billion in revenue and $21.9 billion in net income with 17 and 20 percent increases in their respective columns.
Per usual, Microsoft’s Cloud revenue was the major driving force for the company, representing a 23 percent year over year increase in revenue despite market competition.
Microsoft’s other business sectors also saw significant growth including both its Xbox content and services as well as Windows revenue.
Revenue in Productivity and Business Processes was $19.6 billion and increased 12% (up 11% in constant currency), with the following business highlights:
· Office Commercial products and cloud services revenue increased 13% (up 12% in constant currency) driven by Office 365 Commercial revenue growth of 15%
· Office Consumer products and cloud services revenue increased 4% and Microsoft 365 Consumer subscribers grew to 80.8 million
· LinkedIn revenue increased 10% (up 9% in constant currency)
· Dynamics products and cloud services revenue increased 19% (up 17% in constant currency) driven by Dynamics 365 revenue growth of 23% (up 22% in constant currency)
Revenue in Intelligent Cloud was $26.7 billion and increased 21%, with the following business highlights:
· Server products and cloud services revenue increased 24% driven by Azure and other cloud services revenue growth of 31%
Revenue in More Personal Computing was $15.6 billion and increased 17%, with the following business highlights:
· Windows revenue increased 11% with Windows OEM revenue growth of 11% and Windows Commercial products and cloud services revenue growth of 13% (up 12% in constant currency)
· Devices revenue decreased 17% (down 16% in constant currency)
· Xbox content and services revenue increased 62% (up 61% in constant currency) driven by 61 points of net impact from the Activision acquisition
· Search and news advertising revenue excluding traffic acquisition costs increased 12%
Despite PCs seeing an early resurgence in consumer interest made evident by Windows licesning revenue, Microsoft’s own first party hardware continues to struggle to get back to is +$2B and positive revenue days. Some of the decline can be attributed to the More Personal Computing business being saddled with both HoloLens and Xbox development, both of which are heavy R&D sink holes with razor-thin margins and reliant on a software licesning model that benefits other sectors.
However, new Copilot + PCs were launched in June and Microsoft’s Surface devices were front and center. Healthy sales of those devices should have cut into some of the business decline.
It should be noted that the More Personal Computing business saw its operating income grow by 16 percent which could signal the company working on new Surface and Xbox hardware for a later release.
Nevertheless, Microsoft’s focus appears to be on growing its AI business and is doing so with ballooned financial ambitions. According to The Guardian, the company has racked up $108B in loans for leases data centers it has yet to break ground on. In addition to growing financial investments on data centers, Microsoft is also looking to buy its way out of the resource hogging realities of AI that includes running its own nuclear power plant in Pennsylvannia. Microsoft seeks a purchase of the entire electrical output of a reopened Three Mile Island and perhaps rehabilitate its image beyond its disaterous meltdown back in 1979.
AI-driven transformation is changing work, work artifacts, and workflow across every role, function, and business proces. We are expanding our opportunity and winning new customers as we help them apply our AI platforms and tools to drive new growth and operating leverage.
Satya Nadella, Microsoft CEO
Other earnings highlights include Microsoft still paying off on its Activision acquisition with the company noting that “operating expenses were up $15.8 billion”, resulting in a 10 percent increase from last year with the game publishing firm accounting for 9 points of that increase.
LinkedIn continues to be a bright spot for Microsoft as it contributed its own 10 percent increase as well as search and news seeing their own 12 percent increase year over year.
And despite giving up on the Surface Duo and not owning a mobile operating system itself, Microsoft managed to leech a 10 percent increase in its Enterprise Mobility business which saw its install base grow to 274 million seats.
Microsoft CEO Satya Nadella and excutive vice president and chief financial officer Amy Hood will be on the ivestor call later today to cover investor questions as well as explain their list of Forward-Looking statements that warn of growing cloud and AI competition.
