In the fourth quarter of 2023, Microsoft exceeded expectations and delivered another quarter of double-digit top- and bottom-line growth. It was a record quarter, driven by the continued strength of Microsoft Cloud, which surpassed $33.7 billion in revenue, up 24%.

According to chairman and CEO Satya Nadella, in this period Microsoft has “moved from talking about AI to applying AI at scale.” Microsoft has made aggressive moves to close the gap between AI hype and reality and is taking a leadership position in tech when it comes to monetizing AI.

Here’s an overview of the numbers. 

Quarterly Performance versus Expectations*

Earnings: $2.93 per share, vs. $2.78 per share expected ($2.23 in Q4 2022)

Revenue: $62.02 billion, vs. $61.12 billion expected ($51.9 in Q4 2022)

* Consensus among analysts polled by LSEG, formerly known as Refinitiv

Other Key Numbers

• Microsoft’s revenue increased 17.6% year-over-year in the quarter, which ended on December 31. Net income, at $21.87 billion, or $2.93 per share, increased YoY from $16.43 billion, or $2.20 per share.
• Revenue from Productivity and Business Processes was $19.2 billion and grew 13% ahead of expectations, primarily driven by better-than-expected results by LinkedIn.
• Office Consumer revenue increased 5%, with continued momentum in Microsoft 365 subscriptions, which grew 16% YoY to 78.4 million.
• Usage of cloud-delivered Windows increased more than 50% YoY.
• Windows 11 Commercial deployments increased 2x YoY.
• “Devices” was the only area of revenue with a YoY decline in Q4 2023. Devices revenue decreased 9%.

Analyst Notes from a Modern Work Perspective

Growth in Microsoft’s AI Copilot is strong, but I think it will increase even more rapidly as use cases expand. Early Copilot for Microsoft 365 users were 29% faster in a series of tasks that included searching, writing, and summarizing, according to Microsoft. Copilot has seen faster adoption than any of the Microsoft Office suites (M365, E3, or E5), and Copilot for Windows is already available on more than 75 million Windows 10 and Windows 11 PCs.

The company now has over 400 million paid Office 365 seats, and it reported record usage of Microsoft Teams during the quarter. Teams has become a new entry point for Microsoft, and more than two-thirds of enterprise Teams customers also buy Phone, Rooms, or Premium products from Microsoft.

Other Highlights

Cloud AI is growing quickly as the company infuses AI across every layer of the tech stack. In the latest quarter, Azure has gained market share again, showcasing its AI advantage. Azure stands out in performance in both AI training and inference, boasting a diverse range of AI accelerators, including the latest from AMD and NVIDIA, as well as Microsoft’s proprietary Azure Maia silicon. Azure AI offers access to a comprehensive selection of foundation and open-source models, encompassing both LLMs and SLMs, all integrated with Azure’s infrastructure, data, and tools. The company reports 53,000 Azure AI customers, with over a third of those being new additions in the past year. Azure’s innovative “models as a service” offering simplifies the use of LLMs from partners including Cohere, Meta, and Mistral and eliminates the need for developers to manage the underlying infrastructure.

On the data side, data transactions on the Cosmos DB database—used to build AI-powered apps at any scale—increased 42% YoY. The company also reported growing adoption and utilization of Microsoft Fabric, with a 46% increase QoQ in the volume of data stored in its associated multi-cloud data lake, OneLake.

On the developer front, Microsoft now has more than 1.3 million paid GitHub Copilot subscribers, up 30% QoQ, making it the world’s most widely deployed AI developer tool. GitHub revenue accelerated more than 40% YoY, driven by all-up platform growth and adoption of GitHub Copilot. The company also reported that more than 230,000 organizations have already used AI capabilities in Power Platform, up over 80% QoQ.

Pressures Microsoft Faces

• Must continue to add capacity and stand up infrastructure to meet demand.
• Costly AI investments can erode profits, and there is no assurance that Microsoft will sustain its initial advantage in the competitive AI landscape.
• Limited growth opportunities with mature products such as Micrsoft Office.
• The integration of Copilot by Microsoft Dynamics 365 for Sales and Customer Service has not translated into substantial CRM growth.
• Recent security breaches have increased security concerns among customers. It is worth noting that more than one million customers use Microsoft security products—including 700,000-plus who use at least four.
• Antitrust regulations and growing regulatory pressure to end what regulators say are harmful anticompetitive practices.
• Continued decline in Devices revenue and increased competition in AI PCs.

Looking Ahead

The company expects revenue growth in Microsoft Office Commercial to be driven by Office 365 with seat growth across customer segments and average revenue per user (ARPU) growth through E5. Office 365 revenue growth is expected to be approximately 15% in the next quarter. While Microsoft 365 Copilot is still in its infancy, its adoption to date has been impressive, and the company expects revenue from it to grow rapidly over time.

After reporting its earnings this week, Microsoft announced the GA of Microsoft Copilot for Sales and Microsoft Copilot for Service, which use the functionality of Copilot for Microsoft 365 to provide role-specific insights and actions. It is clear that AI is driving expansion in the tech world, and Microsoft has strategically positioned itself at the forefront of this wave. Time will tell if Microsoft can maintain its current leadership position, because it faces stiff competition.

Related Recent MI&S Coverage on Microsoft

Cloud Networking, Telecommunications, And Security Service Standouts From Amazon, Google, And Microsoft — Will Townsend — December 15, 2023

Analyzing Microsoft’s Datacenter Silicon Announcements At Ignite 2023 — Matt Kimball and Patrick Moorhead — December 5, 2023

Microsoft AI Event Report: Company Unifies Work And Personal Experiences With Copilot For Windows 11 — Patrick Moorhead — November 6, 2023

Microsoft Introduces Generative AI Tools To Boost Creativity — Melody Brue and Patrick Moorhead -—November 6, 2023

Microsoft Aims To Bring AI “To Life” With A Unified Copilot Experience — Melody Brue and Patrick Moorhead — October 11, 2023

Microsoft Puts AI Chat To Work With Bing Chat Enterprise — Melody Brue and Patrick Moorhead — August 14, 2023

Microsoft, Cisco, Adobe And More Bring Generative AI At Work To Where Work Is Done — Melody Brue and Patrick Moorhead — June 22, 2023