Microsoft’s AI strategy is paying off with solid cloud revenue growth

Crediting growing demand for large AI models across consumer and commercial products that are driving increased cloud consumption, Microsoft reported strong FY24 Q1 results last night.

First quarter revenue was up 13% to $56.5 billion compared to $50.1 billion last year. 

Net Income soared 27% to $22.2 billion in Q1  from $17.5 billion in the same quarter a year ago. Gross margin expanded to 71%, up from 69% a year ago, driven by Azure and Office 365 gross margin improvements.

Operating Income still grew 25% despite Microsoft’s AI investments, showing the company’s ability to balance growth and profitability.

FY24 Q1 results reflect how Microsoft successfully turns AI into a revenue accelerator, with Azure’s OpenAI service, Dynamics 365, and the broader Microsoft Cloud Services benefitting. The GitHub Copilot coding assistant now has over 1 million paid subscribers, up 40% quarter-over-quarter, according to CEO Satya Nadella’s comments on today’s earnings call. 

Factoring FY24 Q1 financial results with today’s earnings call shows how efficient Microsoft’s DevOps, R&D, software engineering, product management, and cloud deployment teams are. Achieving double-digit growth is a sure sign of enterprise traction for Microsoft’s products, as is the planned announcement of over 100 new AI-powered products and services at its Ignite conference.

Azure delivers 29% revenue growth in Q1 

Commercial cloud revenue soared 24% to $31.8 billion, powered by 29% growth in Azure cloud platform revenue in Q1. The Commercial cloud business unit comprises Azure, Office 365, Dynamics 365, and other cloud services.

Azure AI services, including machine learning, bot, and cognitive services, contributed three percentage points to this quarter’s 29% revenue growth. Cognitive services revenue, which includes AI APIs, grew 30% to $1.3 billion. Over 18,000 organizations now use Azure OpenAI service, including new Azure customers, showing Microsoft’s investments in OpenAI and AI in general are working as a strategy to help propel it in the wider cloud wars.

AI is paying off faster than Microsoft expected 

Microsoft had originally told investors that  AI wouldn’t deliver revenue gains until 2024 when new products will become widely available. Its Q1 earnings and insights shared show it is ahead of schedule. Microsoft is accelerating generative AI adoption across its tech stacks after investing $13 billion in OpenAI and seeing competitors launch new AI products.

“We are rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for our customers,” said Nadella.  Nadella says Microsoft will introduce more than 100 new products and capabilities, including exciting new AI innovations, at its upcoming Ignite conference.   

With AI driving revenue faster than expected, Nadella doubled down on a unified architecture vision. During today’s conference call, Nadella emphasized that generative AI is part of a unified tech stack and go-to-market strategy for Microsoft’s suite of products and services.

Nadella was emphatic that despite the proliferation of generative AI and the potential to spin off new services, all Microsoft business units and products will standardize on a shared, common generative AI architecture. That’s good news for enterprise software buyers who will require that as a prerequisite for adding generative AI-based Microsoft products and services across its businesses in 2024 and beyond. 

Nadella alluded to enterprise buyers’ growing interest in piloting AI across their organizations. A leading indicator of how much pent-up demand there is across enterprises, Nadella said that Microsoft’s AI-infused productivity suite, Microsoft 365, saw Office 365 commercial revenue grow 18%, driven by 10% seat growth and higher revenue per user.

He continued on the call, saying that Copilot’s capability in Office apps had over 40% of Fortune 100 companies testing it and will reach general availability next week. Microsoft chief financial officer Amy Hood noted that Microsoft expects to sustain double-digit growth for both Office 365 and Azure revenue as more enterprises test and adopt new generative AI-based applications and services.  

Is Bing Chat driving Edge adoption? 

During today’s earnings call, Nadella emphasized that Bing Chat’s many AI-based strengths led to his company’s browser Edge gaining share. It’s a message Nadella has delivered before, most recently in his annual letter.  

On today’s earnings call, Nadella emphasized that “Microsoft Edge has gained share for ten consecutive quarters.” He said, “this quarter we introduced new personalized answers as well as support for [OpenAI’s image generation AI] DALLE-3, helping people get more relevant answers and to create incredibly realistic images. More than 1.8 billion images have been created to date,” Nadella said. 

While it is feasible that Bing Chat’s conversational AI capabilities integrated into Edge are driving increased engagement with users. Microsoft contends that early data shows Bing Chat leads to more search queries per user.

VentureBeat researched the claim and found that Bing Chat hasn’t led to market share gains for Edge and may have led to a loss of share. These two charts show Microsoft Bing’s search market share problem along with a market share analysis completed using Statcounter GlobalStats, show Edge with declining market share in the U.S. over the last five months.