On April 25, Microsoft released its FY24Q3 earnings report, all of which exceeded Wall Street expectations.

The report shows that in the fiscal quarter ended March 31, Microsoft's Q3 revenue of $618.58 billion, compared with $528.57 billion in the same period of the previous year, an increase of 17%; net income rose 20% to $219.39 billion from $182.99 billion in the same period of 2023; and adjusted earnings per share of $2.94, an increase of 20% from the same period of the previous year.

Microsoft shares rose 4.4% after hours as profit and revenue growth overshadowed its over-expected expenses. Meanwhile, Microsoft looked ahead to next-quarter revenue of $64 billion, missing analysts' expectations of $64.5 billion.

Sectoral Data Overview

From the revenue structure perspective, Microsoft's main sources of income come from three departments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. This quarter's financial report also marks the first time since the launch of Microsoft 365 Copilot AI assistant last year that complete quarterly sales figures have been recorded.

• The Productivity and Business Processes department (including products such as Office, LinkedIn, Dynamics, etc.) recorded revenue of $19.57 billion this quarter, with an operating profit of $10.143 billion, showing growth compared to the same period last year. Commercial Office products and cloud services saw a 13% year-on-year increase, primarily driven by a 15% increase in revenue from commercial Office 365 (including Copilot tools); revenue from personal Office products and cloud services increased by 4%, benefiting from a subscription increase to 80.8 million for the personal version of Microsoft 365; LinkedIn revenue increased by 10%; Dynamics products and cloud services revenue increased by 19%, mainly driven by a 23% year-on-year increase in Dynamics 365 revenue.
• The Intelligent Cloud department (including services like Azure, Windows Server, Nuance, and GitHub) reported revenue of $26.708 billion for the period, a 21% year-on-year increase; operating profit was $12.513 billion, exceeding the $9.476 billion reported for the same period last year. This was due in part to a 31% year-on-year increase in revenue from Azure and other cloud services, with Microsoft's server products and cloud services revenue increasing by 24% year-on-year.
• Revenue for the More Personal Computing business (including Windows operating system, devices, gaming, etc.) was $15.58 billion, a 17% year-on-year increase, with an operating profit of $4.925 billion, compared to $4.237 billion for the same period last year. Windows revenue increased by 11% year-on-year, OEM revenue increased by 11% compared to the same period last year, and revenue from commercial products and cloud services increased by 13% year-on-year. Device revenue decreased by 17% year-on-year. Xbox content and services revenue increased significantly by 62% year-on-year, driven by a 61% net impact from the acquisition of Activision Blizzard. Search and news advertising revenue, excluding traffic acquisition costs, increased by 12% year-on-year.

On the expenditure side, Microsoft's third-quarter research and development expenditure was $7.653 billion, compared to $6.984 billion for the same period last year, and AI-driven capital expenditure for the period exceeded analyst expectations by nearly $1 billion. Additionally, sales and marketing expenses of $6.207 billion and general and administrative expenses of $1.912 billion increased compared to last year.

AI is the Key

Since 2023, Microsoft has been collaborating with OpenAI, consistently bolstering LLM and AI technologies. This effort culminated in Microsoft surpassing Apple this year with a market value of nearly $3 trillion, securing the title of "the world's most valuable company." In 2023, Microsoft officially launched the AI chatbot Copilot and later announced the introduction of a paid subscription service.

As of now, over 65% of Fortune 500 companies are using Azure OpenAI, while nearly 60% of Fortune 500 companies are utilizing the Copilot AI program. The paid subscription user base for GitHub Copilot has also reached 1.8 million individuals.

Specifically, Microsoft holds coveted special access to AI technologies from OpenAI and has been consistently integrating them into its product portfolio, including Azure, Bing, and Microsoft 365. The London Stock Exchange predicts that with the robust support of Azure, Microsoft's Intelligent Cloud division could achieve quarterly revenues of up to $28.7 billion.

During the earnings call, Microsoft Chairman and CEO Satya Nadella stated, "Microsoft Copilot and the Copilot stack are carefully orchestrating a new era of AI transformation, driving better business outcomes for every role and industry."

Microsoft CFO Amy Hood noted that the current demand for Azure AI exceeds Microsoft's capacity, which could potentially impact the company's performance in the next quarter. However, Brett Iversen, Microsoft's Vice President of Investor Relations, indicated that the company would accordingly expand the available capacity of AI in response to the surge in demand.

It has been revealed that Microsoft's capital expenditure is expected to increase significantly quarter over quarter due to investments in cloud and AI infrastructure. Capital expenditure for the fiscal year 2025 is projected to exceed that of fiscal year 2024, although specifics still "depend on demand signals and the adoption of services."

Cooperation is Ongoing

Since the launch of Copilot and the enhanced version of Bing last year, Microsoft has never ceased its research and innovation in AI functionalities and services, while also continually expanding its collaborations.

In February this year, Microsoft announced a multi-year partnership with the French AI startup Mistral, making Mistral's models available on the Azure platform. In March, Microsoft revealed the appointment of Mustafa Suleyman, co-founder of DeepMind AI and Inflection AI, to lead its AI division. In April, the release of the small-scale AI model Phi-3-mini was announced, available on Microsoft Azure AI Model Gallery, Hugging Face, and Ollama.

This week, Microsoft and Coca-Cola signed a new 5-year contract worth $1.1 billion, allowing Coca-Cola to utilize Azure cloud services and AI technologies, further accelerating its digital transformation.