Photo Credit: Tawanda Razika from Pixabay

This week, Microsoft (MSFT) announced its fourth quarter results that surpassed market expectations. However, its Azure growth missed analyst estimates, the first time in two years, primarily due to supply constraints in meeting the Azure AI demand.

Microsoft’s Financials

Microsoft’s fourth quarter revenues grew 15% to $64.7 billion, beating analyst estimates of $64.39 billion. EPS was $2.95, which was also ahead of the Street’s forecast of $2.93.

Microsoft’s Intelligent Cloud segment revenues grew 19% to $28.5 billion versus the estimate of $28.68 billion. Azure revenues grew 29%, below the estimated 31%. Azure revenues hadn’t missed analyst estimates since 2022. Azure growth included 8 points from AI services, where demand remained higher than its available capacity.

Revenues from the Productivity and Business Processes unit, including Office productivity software, LinkedIn, and Dynamics, grew 11% to $20.32 billion, beating the Street’s forecast of $20.13 billion. LinkedIn continues to see accelerated member growth and record engagement. About 1.5 million pieces of content are shared every minute on the LinkedIn platform. Video is now its fastest-growing format on LinkedIn, with uploads up 34%. 

Revenue from its More Personal Computing segment grew 14% to $15.9 billion, beating the analyst estimate of $15.29 billion. It has over 500 million monthly active users across platforms and devices.  

For the full fiscal year 2024, Microsoft’s revenues grew 16% to $245.1 billion. Net income grew 22% to $88.1 billion. 

For the first quarter, Microsoft expects revenues of $63.8 -$64.8 billion while analysts expect $65.24 billion. The company expects revenue of $20.3-$20.6 billion or 10%-11% growth in Productivity and Business Processes, $28.6- $28.9 billion or 18%-20% growth in Intelligent Cloud, and $14.9 to $15.6 billion or 9%-12% growth in More Personal Computing in the fourth quarter.

Microsoft’s Supply Constraints

Microsoft had indicated during the last quarter that demand for AI services is outpacing supply. It continues to describe the Azure AI opportunity as supply-constrained. To meet the growing demand signal for its AI and cloud products, Microsoft will scale its infrastructure investments aggressively. Its capex expenditure increased 78% year-over-year in Q4 and FY ’25 capital expenditures are expected to be higher than FY ’24.

About 50% of the expenditure is on long-term assets like land and data center build outs that are expected to drive growth over the next 15 years. CFO Amy Hood has said that with capacity ramping up, Azure growth is positioned to accelerate in the second half of FY25, with AI contributing to about 8% of its growth.

Microsoft’s AI Offerings

During the recent call, Microsoft CEO Satya Nadella disclosed that it has over 60,000 Azure AI customers. Azure AI provides access to AI models that can be customized. Azure OpenAI service provides access to best-in-class frontier models, which includes recently introduced GPT-4o and GPT-4o mini. It’s being used by companies like H&R Block, Suzuki, Swiss Re, Telstra, as well as digital natives like Freshworks, Meesho, and Zomato. 

Last quarter, it introduced Phi-3, a family of cost-effective, open AI small language models (SLMs) models developed by Microsoft. It is being used by companies like BlackRock, Emirates, Epic, ITC, and Navy Federal Credit Union.

With Models as a Service, it provides API access to third-party models from Cohere, Meta, and Mistral. The number of paid Models as a Service customers more than doubled quarter over quarter, and there is increased usage by companies ranging from Adobe and Bridgestone to Novo Nordisk and Palantir.

Microsoft has 36,000 Azure Arc customers, up 90%. Azure Arc helps customers to streamline their cloud migrations. The company added new AI accelerators from AMD and NVIDIA, as well as its own first-party silicon Azure Maia. It also introduced the new Cobalt 100, which provides best-in-class performance for customers like Elastic, MongoDB, Siemens, Snowflake, and Teradata. 

The number of Azure AI customers also using its data and analytics tools grew nearly 50%. Microsoft Fabric, its AI-powered data platform, now has over 14,000 paid customers, up 20% quarter-over-quarter. During the quarter, it introduced real-time intelligence capabilities in Fabric, so customers can unlock insights on high-volume, time-sensitive data. 

Microsoft is also integrating generative AI across Power Platform, enabling anyone to use natural language to create apps, automate workflows or build a website. So far, over 480,000 organizations have used AI-powered capabilities in Power Platform, and there are 48 million monthly active users, up 40%.

GitHub Copilot is one of the most widely adopted AI-powered developer tools. It has over 77,000 customers, up 180%. GitHub’s annual revenue run rate is now $2 billion. Copilot accounted for over 40% of GitHub’s revenue growth this year.

The company’s stock was last seen trading at around $408.49 with a market capitalization of approximately $3.03 trillion. It hit a 52-week high of $468.35 in early July. It hit a 52-week low of $309.45 in September last year.

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