Microsoft posts strongest revenue growth in two years led by AI interest

Chief Executive Officer Satya Nadella has pledged to turn Microsoft into an artificial intelligence powerhouse by partnering with leading startup OpenAI. Those efforts got a boost during the quarter thanks to the release of AI-infused Office software for businesses.

“Microsoft had a lot to live up to this quarter,” Hargreaves Lansdown analyst Sophie Lund-Yates wrote in a note to clients. The company “delivered a healthy set of results,” she added, “but not in a strong enough dose to appease the market.”

In an interview, Chief Financial Officer Amy Hood said AI boosted Azure’s growth rate by 6 percentage points. Going forward, she said, interest in AI products will prompt customers to step up their use of such basic services as storage and computing power. “We want to be the place where people can most confidently come to run AI models,” Hood said.

For his part, Mark Moerdler, an analyst at Sanford C. Bernstein & Co., said the fact that six percentage points of Azure growth came from AI means that, “the rest of Azure continues to slow.”

Commercial cloud product revenue rose 24% to $33.7 billion, Microsoft said in a slide presentation on its website. The company on November 1 widely released the corporate version of its Microsoft 365 Copilot — an AI assistant for Office programs like Outlook, Word, PowerPoint and Teams — to large customers. This month, Microsoft expanded access to smaller firms and released a $20 consumer version. The new tools cost companies an extra $30 a month on top of their existing subscriptions, and could one day become a meaningful source of recurrent revenue.

Microsoft’s Office cloud service for business users also topped 400 million paid customers in the quarter, Hood said.

Xbox content and services revenue jumped 61%, the first quarterly result that included Activision Blizzard Inc., acquired in October to bolster the Xbox business. Last week, the company cut 1,900 jobs across the game division, many of them at Activision Blizzard. On Monday, Xbox named a new president for the Blizzard unit, Johanna Faries, as Microsoft tries to integrate the acquired businesses and jump-start growth in gaming revenue.

The Redmond, Washington-based company has invested $13 billion in startup OpenAI, a partnership that vaulted the 48-year-old software maker to the forefront of a race to build new applications that let customers generate fresh content from their own data and information scraped from the web. The partnership underwent a brief period of drama in November when OpenAI’s board ousted co-founder and key Nadella ally Sam Altman, then returned him to his leadership role at the company a few days later — after Microsoft offered to hire him instead.

While the management turmoil grabbed attention, it probably didn’t hurt Microsoft’s AI revenue much, if at all, Jefferies analyst Brent Thill wrote in a note to clients. Still, investors are waiting for Microsoft to provide hard data and forecasts on how and when AI will offer a meaningful contribution to the bottom line.