Microsoft Bets Big on AI as Demand Surges Across Cloud and Software Businesses

Microsoft is doubling down on artificial intelligence (AI) as a driver of growth. During the company’s fiscal fourth-quarter earnings call on Tuesday (July 30), executives described surging demand for AI services across its cloud and software portfolio.

The tech giant reported that Azure AI, its cloud-based AI platform, grew 30% year-over-year and now accounts for 8 percentage points of Azure’s overall growth. This comes as Microsoft grapples with capacity constraints in meeting the explosive demand for AI services.

“Azure growth included eight points from AI services, where demand remained higher than our available capacity,” said Amy Hood, Microsoft’s chief financial officer. She added that the company expects “Azure growth to accelerate as our capital investments create an increase in available AI capacity to serve more of the growing demand” in the second half of fiscal year 2025.

To meet this demand, Microsoft is ramping up its capital expenditures. Hood revealed that about half of the company’s capital spending is on “land and builds and finance leases” for data centers, investments that will “be monetized over 15 years and beyond.” The other half is dedicated to “CPUs and GPUs to serve customers based on demand signals.”

The company stated it expects capital expenditures to increase in fiscal year 2025 to support growing AI and cloud demand but did not give a precise figure.

Satya Nadella, Microsoft’s CEO, emphasized the company’s focus on capturing the AI opportunity: “We are investing for the long term in our fundamentals, in our innovation, and in our people.” He likened the current AI transition to the earlier shift to cloud computing, describing both as “knowledge and capital-intensive investments.”

Microsoft saw revenue soaring 15% to $64.7 billion and net income jumping 10% to $22 billion. The company’s cloud juggernaut, Azure, led the charge with a 29% revenue surge. Executives touted AI leadership and highlighted record bookings, with Microsoft Cloud revenue hitting $36.8 billion. The Intelligent Cloud segment was the star performer, growing 19% to $28.5 billion. Even gaming got a boost, with Xbox content and services revenue skyrocketing 61%, thanks largely to the Activision acquisition. With these results, Microsoft wrapped up the fiscal year 2024 boasting $245.1 billion in revenue and $88.1 billion in net income, both up over 20% year-over-year.

Copilot Drives Growth Across Products

The impact of AI is being felt across Microsoft’s product lines. Nadella highlighted the success of Copilot for Microsoft 365, the company’s AI-powered assistant for productivity software.

“The number of people who use Copilot daily at work nearly doubled quarter over quarter,” he said, adding that “Copilot customers increased more than 60% quarter over quarter.”

Perhaps most telling was Nadella’s revelation about GitHub Copilot, the company’s AI pair programming tool: “Copilot accounted for over 40% of GitHub revenue growth this year, and is already a larger business than all of GitHub was when we acquired it.”

This success in developer tools appears to be a blueprint for Microsoft’s broader AI strategy. Nadella explained, “What used to be line of business applications to us are Copilot extensions going forward. So we think of this as really a new design system for knowledge and frontline work to drive productivity, which will be very akin to what has happened in software engineering.”

The company sees potential for AI to transform various business functions. “When you think about marketing or finance or sales or customer service, we’ll effectively replicate what you just said, which is the type of productivity we’ve seen in developers will come to all of these functions,” Nadella predicted.

Microsoft’s AI push extends to its Dynamics 365 business applications as well. Nadella pointed to the contact center as an area ripe for AI-driven transformation: “We ourselves are … on a course to save hundreds of millions of dollars in our own customer support and contact center operations. I think we can drive that value to our customers.”

Despite the heavy investments in AI infrastructure, Microsoft remains focused on maintaining financial discipline. Hood stated, “We will remain disciplined on operating expense management,” and projected that operating expenses would grow in the single digits for fiscal year 2025.

The company’s ability to leverage its existing cloud infrastructure for AI workloads appears to be paying dividends. Hood explained, “Because we’re building to one Azure AI stack, we don’t have to have multiple infrastructure investments. … It does, in fact, make margins start off better and obviously scale consistently.”

To address near-term capacity constraints, Microsoft has formed partnerships with other tech companies. “We’ve signed up with third parties to help us, as we are behind with some leases on AI capacity,” Hood said. Nadella added that these partnerships are “no different than leases that we would have done in the past” and may even be “more efficient leases because they’re even shorter dates.”

Future of AI and Microsoft

Looking ahead, Microsoft expects its AI investments to drive growth across its cloud and software businesses. The company is betting that AI will not only enhance existing products but also create new categories of software and services.

As Nadella put it, “At the end of the day, GenAI is just software.” But it’s software that Microsoft believes will reshape the technology landscape and drive the next wave of productivity gains across industries.

With its deep pockets, vast cloud infrastructure, and broad software portfolio, Microsoft appears well-positioned to capitalize on the AI boom. However, the company will need to navigate challenges such as capacity constraints, potential regulatory scrutiny, and competition from other tech giants also investing heavily in AI.

As the race to dominate the AI era heats up, investors and industry observers will closely watch Microsoft’s ability to execute its ambitious AI strategy while maintaining financial discipline.