AI Services Bolster Microsoft Corp’s Performance

Team Veye | 04-Nov-2024

Microsoft Corp (NASDAQ: MSFT)

Microsoft has posted a strong start to its fiscal year, driven by robust performance in its Microsoft Cloud business, which saw revenue rise 22% YoY to $38.9 billion. Notably, Microsoft’s rapidly scaling AI segment is nearing a $10 billion annual revenue run rate, positioning it as the fastest-growing segment in the company's history. This AI-driven growth, coupled with cloud adoption, is transforming workflows across all industries, creating substantial new opportunities for customer growth and operating leverage. 

The company's cloud momentum was further boosted by Azure Arc, now deployed across over 39,000 customers in a wide range of industries, marking an 80% increase YoY. Microsoft also expanded its global infrastructure footprint with new data centres announced in Brazil, Italy, Mexico, and Sweden, aligning with long-term demand projections.

Microsoft Cloud’s growth was propelled by sustained cloud migration and strong commercial demand, particularly for Azure and Microsoft 365. Commercial bookings were notably strong, surpassing expectations with a 30% increase (23% in constant currency). Microsoft secured a growing number of large-scale contracts, including several $10 million-plus and $100 million-plus deals, highlighting robust customer commitment. The commercial remaining performance obligation rose 22% (21% in constant currency), reaching $259 billion, with 40% of this amount expected to convert to revenue over the next 12 months, up 17% YoY.

Revenue from Productivity and Business Processes was $28.3 billion, reflecting a 12% YoY increase, exceeding expectations across all segments. Microsoft 365’s commercial cloud revenue grew by 15% (16% in constant currency), supported by strong ARPU gains, particularly in E5 and M365 Copilot products. Paid M365 commercial seats rose 8% YoY, driven largely by SMB and frontline worker demand, with M365 commercial cloud revenue now comprising nearly 90% of Microsoft’s total M365 products and services revenue. The recent Activision acquisition contributed approximately 3 percentage points to total revenue growth, albeit with a 2-point drag on operating income and a 5-cent reduction in EPS, due to transition-related expenses. Overall gross margins declined 2 points YoY to 69%, impacted by scaling AI infrastructure and acquisition costs. However, the cloud segment performed slightly above expectations with a gross margin of 71%.

Operating expenses grew by 12%, a moderate increase attributed to a continued focus on efficiency and strategic prioritization, inclusive of 9 points due to the Activision acquisition. Excluding this acquisition, headcount growth stood at 2%. Operating income increased by 14%, with operating margins at 47%. Adjusting for the Activision impact, operating margins increased by 1 point YoY, reflecting efficient cost management and strategic investments in AI. Looking ahead, Microsoft is set to capitalize on its AI leadership with accelerated monetization across the Microsoft Cloud, positioning itself to drive shareholder value through strategic long-term investments. The company’s disciplined cost management and prioritization efforts remain central to sustaining growth and enhancing operational efficiency as it navigates expansion in cloud and AI infrastructure.

(Source: Company’s Report)

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