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6 key takeaways from Microsoft’s annual report

$10.7 billion in Q4 CapEx was "both the data centers… plus CPUs and GPUs and networking equipment" with spending to accelerate, said CFO Amy Hood.

Microsoft's 2023 earnings in brief
Microsoft CFO Amy Hood

A snapshot of Microsoft's 2023 earnings, spanning CapEx, ERP, LinkedIn revenues, AI pull-through on Azure and more.

Microsoft added 100 new customers to its Azure OpenAI service every day over the last quarter – with 11,000 organisations now subscribing to the AI offering and enterprises continue to explore large language model capabilities.

The swell of users tipped annual Microsoft cloud revenues over $110 billion, with Azure alone accounting for more than 50% of that for the first time.

CEO Satya Nadella named IKEA, Moody’s, Volvo Group, Zurich Insurance, and Mercedes-Benz among Azure OpenAI customers – saying that the latter is “bringing ChatGPT via Azure OpenAI to more than 900,000 vehicles in the US.”

The figures were revealed in Microsoft’s fiscal Q4 earnings call on July 25. The Stack listened in. Here are 6 key takeaways from Microsoft’s 2023 earnings.

1) Microsoft's 2023 earnings: The hard numbers

Microsoft continues to be a colossal cash generator. Annual revenue was $211.9 billion and net income $72.4 billion. R&D expenditure hit $24.5 billion.

CapEx for Q4 alone was $10.7 billion “to support cloud demand ” – pressed by analysts on the precise nature of CapEx, CFO Amy Hood said it’s “both the data centers… plus CPUs and GPUs and networking equipment, think of it in a broad sense as opposed to a narrow sense. So it's overall increases of capacity.”

2) The bad news

Despite those huge revenues, it wasn’t all good news for Redmond. Windows OEM revenue fell 12%, driven by a slump in the PC market. Devices revenue fell 20%. Operating expenses of $15 billion were up 2% “driven by a charge related to the Irish Data Protection Commission matter…” a presentation showed.

That “matter” appears to refer to an expected charge of $425 million in the last quarter over alleged privacy violations at LinkedIn, which Microsoft had flagged in June. Curiously, the regulator’s order is not public and the issue (one of targeted advertising practicses) appears to have been quietly addressed.

3) Windows 11 and virtual desktops

Windows 11 adoption continues to pick up with the number of devices running the OS (first released in October 2021) doubling in the last year with Redmond flagging deployments “by companies like AT&T, Krones and Westpac.”

Virtual/cloud desktop use also grew: “Azure Virtual Desktop and Windows 365 together surpassed $1 billion in revenue for the first time over the past 12 months. Enbridge, Eurowings, Marriott International and TD Bank Group, for example, all chose cloud-delivered Windows this quarter” Microsoft confirmed.

4) LinkedIn and AI articles

LinkedIn continues to flourish. Its revenue passed $15 billion for the first time in fiscal 2023. Membership growth has accelerated for eight quarters in a row with its “Talent Solutions” business surpassing $7 billion in revenue.

Back in March 2023 the platform announced that it would be using AI to generate content. Its “AI-powered collaborative articles are now the fastest-growing traffic driver in LinkedIn” executives said on the earnings call.

LinkedIn growth will, however, “continue to be impacted by the overall markets for recruiting and advertising, especially in the technology industry, where we have significant exposure,” said Microsoft CFO Amy Hood on the earnings call.

5) AI to drive Azure growth?

Microsoft expects AI to continue to drive Azure growth despite what is a clear slowdown in cloud spending globally as CIOs take more aggressive FinOps approaches to cloud spend and look for efficiencies across their IT estates.

Azure grew 26% “including roughly 1 point from AI services” in Q4. But Satya Nadella emphasised that broader AI adoption would pull in more business.

“The platform effect here is really all about the extensibility of the Copilots. You see that today, when people build applications in Teams that are built on Power Apps and those Power Apps happen to use something like SQL DB on Azure. That's like a classic line of business extension,” Microsoft’s CEO told analysts.

“You'll see the same thing [with AI]. When I have a Copilot plug-in, that plug-in uses Azure AI, Azure meters, Azure data sources, Azure semantic search. So you'll see, obviously, a pull through not only on the identity or security layer, but in the core PaaS services of Azure plus the Copilot extensibility in M365.”

6) Business Applications

Microsoft continues to gun for some entrenched ERP and other workloads and Nadella claimed to be “taking share in every category as we help organizations… transform their mission-critical business processes.”

That saw Microsoft Dynamics surpassed $5 billion in revenue over the past fiscal year “with our customer experience, service and finance and supply chain businesses all surpassing $1 billion in annual sales” – with Redmond building its Dynamics 365 AI “Copilots” into its ERP portfolio during the last quarter of fiscal 2023 for the first time, “including finance, project operations and supply management… sellers can ground their customer interactions with data from CRM systems, including both Salesforce and Dynamics to personalize customer interactions and close more deals” Nadella said.

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