Microsoft bets on cloud growth as it continues to battle PC sales slump

Increased revenue across Microsoft’s cloud computing, Office software, and server segments have helped the tech giant see its net income reach $18.3 billion for the March quarter, an increase of 9% year-on-year.

Server products and cloud services both saw revenue growth of 17%, with Azure revenue up 27%, while Office commercial products and cloud services revenue also grew by 13% this quarter. The overall company revenue for the quarter increased 7% to $52.9 billion.

The changes Microsoft has made to its software offerings have clearly worked in the company’s favor. Three months after launching its new Basic subscription tier, the company reported that its Microsoft 365 consumer subscription numbers have now topped 65.4 million, representing a 12% increase in the company’s third quarter.

Additionally, Teams usage is at an all-time high and surpassed 300 million monthly active users this quarter, CEO Satya Nadella told analysts on a call after the earnings report was released. This figure represents a 20 million increase from the 280 million DAU the company reported back in January of this year.

However, despite growth in a number of key business segments, the challenges faced by the company when it comes to falling Windows and devices sales have persisted from the previous quarter. Microsoft’s device revenue dropped by 30% in the third quarter of 2023, a figure that is largely consistent with forecasts from major analysts houses such as IDC and Gartner who have reported that shipments of PCs and laptops had experienced a 30% decrease from the first quarter of 2022.

Sales of Windows operating system licenses to device makers also took a hit, falling by 28% in this quarter.

Hardware sales in Microsoft’s gaming segment also took a hit, with Xbox hardware revenue also dropping by 30% this quarter. Currently, Microsoft is embroiled in multiple antitrust probes from the UK’s Competition Markets Authority (CMA), the European Commission, and the Federal Trade Commission (FTC) in the UK regarding its proposed purchase of gaming studio Activision Blizzard, with the CMA due to issue their final decision on the acquisition imminently.

AI to drive future revenue

While software and cloud services remain the bedrock of Microsoft’s business, since the start of this year, most Microsoft news has resulted from the company’s partnership with OpenAI, the parent company of ChatGPT. As a result, Microsoft executives have been pointing to the generative AI technology as a future revenue driver due, in part, to the technology’s widespread integrations.

Nadella told analysts the company already had more than 2,500 Azure-OpenAI service customers and said AI was integrated into a wide array of products, such as the company’s search engine Bing, which now has 100 million daily users and has seen downloads jump since the addition of AI features.

Furthermore, over 10,000 organizations have already signed up for Microsoft’s Copilot for Business, with Nadella saying the company will be releasing more information about its AI plans over the coming months.

“As with any significant platform shift, it starts with innovation, and we’re excited about the early feedback and demand signals from the AI capabilities we’ve announced to date,” Microsoft’s CFO Amy Hood said on the same analyst conference call. “We will continue to invest in our cloud infrastructure, particularly AI-related spend, as we scale to the growing demand driven by customer transformation. And we expect the resulting revenue to grow over time.”

Microsoft 365 continues to face outages

On the day it announced its financial results, Microsoft suffered another systems outage, with the company’s Microsoft 365 Status account tweeting, “We’ve identified an issue affecting Exchange Online connectivity for users in North America and are investigating further.”

According to Downdetector, an online platform that tracks outages, thousands of users reported experiencing server connection and login issues.

An hour after the Twitter account announced it was investigating the issue, the company confirmed that the issue had been resolved.

Yesterday’s incident is the second outage Microsoft experienced this week, and the fifth major outage this year.