① Microsoft announced financial results for the third fiscal quarter. According to expectations, the stock price rose by more than 4% during the transaction; ② A number of businesses covered the AI layout, and the release of results showed AI's ability to monetize; ③ profit growth is still expected in the context of a surge in capital expenditure.
“Science and Technology Innovation Board Daily”, April 27 (Special Correspondent Chen Junqing, Reporter Zhu Ling) According to Microsoft's latest fiscal quarter results for the 2024 fiscal year ending March 31, revenue was 61.9 billion US dollars, an increase of 17%, higher than market expectations of 60.9 billion US dollars. Net profit was US$21.94 billion, up from US$18.3 billion in the same period last year, and earnings per share of US$2.94, exceeding Wall Street's target of US$2.82.
Microsoft predicts that the company's revenue for the next fiscal quarter will reach between US$63.5 billion and US$64.5 billion, slightly lower than analysts' expectations of US$64.7 billion.
It is worth noting that Microsoft's cloud revenue for the quarter was US$35.1 billion, up 23% year over year, of which Azure and other cloud services that launched Azure OpenAI increased 31%. Of Azure's growth, 7 percentage points were related to AI, up from 6 percentage points in the previous quarter.
Microsoft Chief Financial Officer Hood said, “Capacity bottlenecks are affecting the AI portion of Azure's growth, and Microsoft has been increasing capital expenditure to ensure that Nvidia graphics cards are the graphics processing units that train and run artificial intelligence models.”
Additionally, Microsoft Chairman and CEO Satya Nadella said, “Microsoft Copilot and the Copilot stack are carefully planning a new era of artificial intelligence transformation, driving better business results for every role and industry.”
▍ AI drives overall business growth
On the business side, Microsoft's productivity and business processes, intelligent cloud, and personal computing can all see its layout in the AI field. Among the three businesses, Microsoft products equipped with an AI engine include Bing, which integrates ChatGPT, Office 365 connected to Copilot, and Azure, which has launched the Azure OpenAI service. So how are these businesses and products performing, and how much revenue does AI bring to Microsoft?
Microsoft launched the new Bing supported by the GPT4 model in February 2023. Currently, its market share has grown from 2.97% in 2023 to 3.42% in January 2024. Microsoft has inserted ads into some of Newbing's responses to generate revenue. According to the latest quarterly report, search and advertising revenue increased 12%, exceeding expectations, and AI contributed positively to the business. However, search and advertising account for a relatively small share of revenue, and their contribution to performance growth is limited.
Let's take another look at the Office business affected by AI. In November 2023, the Microsoft 365 Copilot Enterprise Edition was officially launched, and Microsoft announced that GPT-4 will connect to the Office Family Bucket using Copilot. Microsoft revealed during the conference call that on the B-side, nearly 60% of the top 500 companies are currently using Copilot, and Offcie365 commercial revenue has increased 15%, mainly due to ARPU growth and CoPilot's progress. Credit Suisse estimates that if 10% of existing paid commercial users were upgraded to the Copilot version, it would generate $14.9 billion in revenue over the next 5 years.
LIVY Investment Research said that after Copilot is fully popularized, the premium Copilot subscription fee of $30 per user per month will bring Microsoft $144 billion in incremental revenue. Considering the long-term expected price increase, the incremental revenue is likely to be even greater.
In addition to the Microsoft 365 Copilot add-on, Microsoft also charges $10 to $39 per month for GitHub Copilot. As of the third quarter, GitHub Copilot currently has more than 1.2 million paid subscribers, an increase of 30% over the previous quarter.
So far, the company has not disclosed Copilot's sales or user data. Office365 commercial growth is 15%, and the market continues to be optimistic about Copilot's ability to generate revenue.
In terms of cloud business, Microsoft's cloud revenue this quarter was 35.1 billion US dollars, which has achieved three consecutive quarters of growth. This is also the point where Microsoft's financial report has exceeded expectations the most. The cloud business is Microsoft's biggest revenue driver, including the Azure computing platform. Excluding the effects of currency fluctuations, Azure's revenue grew 31%, higher than market research firm Visible Alpha's 29% growth forecast. After the addition of artificial intelligence, Azure's revenue on the B-side increased. Currently, more than 65% of the Fortune 500 companies use Azure's open AI services.
Microsoft Chief Financial Officer Hood said that the scale of deals Microsoft has reached with companies that use Azure is constantly growing. However, she warned that Microsoft's demand for consumption-based cloud artificial intelligence services is in short supply. Limitations on AI computing power may hinder sales growth. She also said that Microsoft intends to scale up to meet the growing demand for cloud and artificial intelligence products.
Brett Iversen (Brett Iversen), vice president of investor relations at Microsoft, said: “We continue to see a significant increase in customer demand. Therefore, we are making sure to expand our available production capacity in line with this situation.”
▍ Surge in capital expenditure
In the quarterly report call, Microsoft's capital expenditure for the quarter was US$14 billion, mainly for the company's cloud needs and AI infrastructure construction. Considering that demand for artificial intelligence is still very strong, the company expects capital expenditure to continue to increase significantly in the future. Despite a significant increase in the company's capital expenditure, the company still anticipates a 2% year-on-year increase in operating margin for the 2024 fiscal year.
Jeremy Goldman (Jeremy Goldman), senior director of Emarketer, said that Microsoft's AI-based financial reports show that redoubled innovation is paying off. He pointed to the company's early initiatives in the field of generative artificial intelligence, such as a significant investment in ChatGPT maker OpenAI.
Overall, the AI demand side is showing strong performance as always, and Microsoft's continued layout on AI is already reflected positively in terms of revenue. IDC analyst Wayne Kurtzman once said, “Artificial intelligence is still a new thing, and no one knows how to price it. No one knows how much it will cost.” How Google's AI monetization path will develop is worth watching for a long time.