Microsoft AI Strategy: Massive Investment and Growth Challenges

Despite significant growth in AI-related business and higher-than-expected capital expenditure, the company's total revenue for the quarter decreased slightly by 1.8% year-over-year, while new orders also declined by 12%.

Microsoft's Financial Situation for 2024Q2

  1. Revenue was $64.8 billion, up 15% year-over-year (compared to 17% growth in the previous quarter), exceeding the consensus expectation of $64.5 billion.

  2. Net profit was $22.036 billion, up 9.5% year-over-year (compared to 20% growth in the previous quarter), slightly exceeding the consensus expectation of $22 billion.

Overall, although revenue and net profit slightly exceeded market consensus expectations, growth rates declined compared to the previous quarter.

Guidance for FY25: Double-digit revenue growth, double-digit operating profit growth, 1% decrease in operating profit margin (consistent with the previous quarter's guidance).

Dividends and buybacks remained largely unchanged from the previous quarter. A dividend of $0.75 per share was announced, with $4.21 billion in stock buybacks in the second quarter.

Microsoft's 2024Q2 Revenue by Business Segment

  1. Intelligent Cloud: Revenue of $28.5 billion, up 19% year-over-year, slightly below market expectations of $28.7 billion.
  • Cloud business growth slowed compared to the previous quarter, mainly due to slightly lower-than-expected growth in some European regions in June, and capacity constraints in Microsoft's infrastructure, which couldn't fully meet market demand.
  • AI revenue and AI proportion in cloud business continued to grow.
  1. Productivity and Business Processes: Revenue of $20.3 billion, up 11% year-over-year, slightly above market expectations of $20.2 billion.
  • Office revenue didn't show significant growth after AI empowerment (Copilot).
  1. Personal Computing: Revenue of $15.9 billion, up 14% year-over-year, slightly above market expectations of $15.5 billion.
  • Windows OEM growth rate declined compared to the previous quarter; the PC market has not yet recovered, and AI PC products have not brought significant growth.
  • Xbox content and services revenue grew by 61%, with the net impact of the Activision Blizzard acquisition accounting for about 58 percentage points.
  • Search and advertising business continued to grow under AI empowerment, with revenue up 19% year-over-year this quarter.

Q3 2024 guidance by business segment: Intelligent Cloud revenue to grow 18-20% year-over-year (Azure guidance +28%-29%cc), Productivity and Business Processes to grow 10-11% year-over-year (Office 365 Commercial guidance +14%cc), Personal Computing guidance 9-12% year-over-year growth (Xbox guidance 50-55%cc).

Microsoft's 2024Q2 Conference Call

  1. Cloud business: Expanded data center layout, announcing investments across four continents. These are long-term assets worldwide that will drive growth for the next decade and beyond. Over 60,000 Azure AI customers, up nearly 60% year-over-year, with average spend per customer continuing to grow. The number of Azure AI customers using data analytics tools grew by nearly 50% year-over-year. Copilot is driving GitHub's growth, with GitHub's annual revenue now at $2 billion. This year, Copilot accounted for over 40% of GitHub's revenue growth.

  2. Productivity and Business Processes: Office Copilot customers grew 60% quarter-over-quarter, with daily active users doubling quarter-over-quarter. The number of customers with over 10,000 seats more than doubled quarter-over-quarter, including Capital Group, Disney, Dow Chemical, with EY alone deploying Copilot to its 150,000 employees.

  3. Personal Computing: For PCs, introduced a new category of Copilot+ PC this quarter, with Windows 11 active devices up 50% year-over-year. For LinkedIn, membership growth accelerated, with 1.5 million pieces of content now shared on the platform every minute. Video is now the fastest-growing format on LinkedIn, with uploads up 34% year-over-year. In gaming, driven by the Activision Blizzard acquisition, Xbox content and services revenue grew 61%, now with over 500 million monthly active gaming users across all platforms and devices. Search and advertising continued to grow under AI empowerment, with revenue up 19% year-over-year this quarter.

  4. Security business: Now has over 1.2 million security customers, and Defender for Cloud (cloud security solution) revenue exceeded $1 billion in the past 12 months.

  5. Performance guidance: For the next quarter, Intelligent Cloud revenue to grow 18-20% year-over-year (Azure guidance +28%-29%cc), Productivity and Business Processes to grow 10-11% year-over-year (Office 365 Commercial guidance +14%cc), Personal Computing guidance 9-12% year-over-year growth (Xbox guidance 50-55%cc).

Analysis of Microsoft's 2024Q2 Performance

  1. Operating revenue and profit: Revenue was $64.8 billion, up 15% year-over-year (compared to 17% growth in the previous quarter), slightly exceeding the consensus expectation of $64.5 billion. Net profit was $22.036 billion, up 9.5% year-over-year (compared to 20% growth in the previous quarter), slightly exceeding the consensus expectation of $22 billion. Overall, revenue and profit met consensus expectations, but year-over-year growth rates declined. This was mainly due to slightly lower-than-expected growth in some European regions this quarter, and capacity constraints in Microsoft's infrastructure, which couldn't fully meet market demand.