CrowdStrike, AI and Copilot+ PCs are expected to come up during the quarterly earnings call Tuesday.

The CrowdStrike update incident. Details on the cost and revenue from artificial intelligence. And updates on the rollout of AI PCs.

Microsoft executives have a lot to cover Tuesday during the Redmond, Wash.-based tech giant’s fourth fiscal quarter earnings report. The earnings will cover the three months and year ended June 30.

In a July 17 report by Bank of America, the firm said that channel partners suggesting strength in Azure and a forming Copilot cycle helped Bank of America put a 1 percent upside on its estimate of Microsoft’s fourth fiscal quarter revenue coming in at $64 billion – 11 percent year over year not including revenue from Microsoft gaming subsidiary Activision.

[RELATED: The CrowdStrike-Microsoft Outage Is Likely To Curtail Auto-Updates. That May Not Be A Good Thing.]

Microsoft Q4 2024

Microsoft has more than 400,000 partners worldwide, according to CRN’s 2024 Channel Chiefs.

The firm has a sunny preview for Tuesday’s call in part due to “sustained Azure strength, Office E3/E5 premium mix, early Microsoft Copilot traction and a normalizing PC/Windows buying environment,” according to the Bank of America report.

Bank of America expects Microsoft to estimate double-digit revenue growth for fiscal year 2025, with perhaps 20-plus percent Office growth by the first fiscal quarter of 2026.

A July 15 report from Morgan Stanley, meanwhile, predicts 22 percent growth year over year to about $37 billion in revenue for Microsoft Cloud.

As for Microsoft’s revenue estimates for the first quarter of its 2025 fiscal year, Morgan Stanley predicts Microsoft will forecast:

• $21 billion in the first quarter for the productivity and business processes (PBP) segment, up about 12 percent year over year – $87 billion for the year, an increase of 12 percent year over year
• $30 billion for the “intelligent cloud” (IC) segment in the first quarter, an increase of 22 percent year over year – $130 billion in revenue for the year, an increase of 23 percent year over year
• $16 billion, an increase of 16 percent year over year, in the first quarter for the “more personal computing” (MPC) segment – $67 billion for the year, an increase of 9 percent year over year
• And $284 billion in total revenue for the 2025 fiscal year, an increase of 16 percent year over year.

Read on for more of what to expect during Microsoft’s fourth fiscal quarter earnings call.

CrowdStrike Incident, Microsoft Security Business Updates

Tuesday’s earnings call will mark Microsoft’s since the July 19 faulty CrowdStrike update that downed 8.5 million Windows machines worldwide – less than 1 percent of Windows systems.

Analysts will likely look for details from Microsoft leadership on whether the vendor could have done anything to prevent the incident and whether Microsoft intends to make changes to third-party vendor access to Windows.

It is possible that Microsoft’s hands are tied from making any major changes and that it is up to third-party vendors such as CrowdStrike to self-police updates.

Security and policy experts online have debated whether a 2009 agreement between Microsoft and the European Commission concerning access to Microsoft products by third parties is to blame for the seriousness of the damage done by the CrowdStrike update.

A July 19 report by Wedbush called the incident a “PR nightmare for CrowdStrike and Microsoft,” but noted that the incident “is all related to this technical update from CrowdStrike.”

Without directly naming Microsoft, Wedbush pointed out that the incident “could create opportunity for some competitive displacements but this will take time to determine the path of CIOs and companies looking ahead and related legal actions related to this outage.”

Microsoft might also use the call to highlight investments in its security business – perhaps using the CrowdStrike incident to advocate for customers relying less on third-party offerings and exploring Microsoft’s own security products.

The vendor has promised an incremental $90 million “to accelerate security growth” with partners in the new fiscal year.

Two recent reports from KeyBanc called out newer Microsoft security products that could move the needle in the industry. First, Microsoft said it will make Microsoft Purview Data Governance generally available (GA) on Sept. 1 and integrate its Copilot AI tool.

A July 21 report from KeyBanc said that the firm expects this offering “to be incrementally competitive to” data security posture management (DSPM) vendors including CrowdStrike’s Flow Security, BidID, Palo Alto Networks’ Dig Security and Rubrik’s Laminar.

On July 15, a KeyBanc report highlighted Microsoft’s general availability of Entra Suite as “as an incremental negative for identity vendors” such as Okta.

A July 18 Morgan Stanley report noted that security software remains a top priority for CIOs, just behind AI and machine learning (ML) and ahead of digital transformation, cloud computing and business intelligence and analytics.

Microsoft AI Strategy, Spending Updates

Most of Microsoft’s next earnings call is likely to focus on the vendor’s AI offerings and strategy in dominating the emerging market – not to mention obstacles.

A July 15 report from Morgan Stanley said that Microsoft needs to address the “magnitude and timing” of making money off generative AI.

“We remain confident in the magnitude of upside to forward estimates driven by core IT budget spending intentions pushing more share to Microsoft as well as the GenAI monetization ramp given the company’s strong early positioning, but addressing the latter is increasingly more important to the go forward debate and could determine how investors judge further investments behind the GenAI opportunity,” according to Morgan Stanley. “The breadth of positive data points on improving Microsoft spending intentions reaffirms our view the company will be able to climb the wall of timing worries.”

Microsoft has a chance to address concerns over the margins on AI product cycles and how much it needs to spend to stay competitive as an AI vendor, according to Morgan Stanley. The firm estimates $63 billion in total capital expenditures by Microsoft in fiscal year 2025 – double the CapEx of fiscal year 2023.

Morgan Stanley hopes to hear Microsoft leadership explain that AI inference is a driver of CapEx, showing that the vendor isn’t “investing in front of demand.”

The firm also wants to hear that “every chip is accounted for” and learn more about OpenAI’s training infrastructure needs given that “the industry consensus is that future models require orders of magnitude more compute and therefore more data center infrastructure.”

Morgan Stanley hopes that Microsoft leadership can alleviate concerns that “the infrastructure investment needed to support future models, assuming model scaling continues to be exponential, as suggested by most industry experts, would suggest a cash outflow so significant that it would meaningfully impact Microsoft’s financials.”

A July 18 report from Morgan Stanley noted that chip supplies were the major AI hindrance of six months ago, “energy and electric components have since emerged as the key global bottleneck” for all vendors.

“Time to power is increasingly dictating AI Datacenter build out, meaning that demand and stock performance further downstream in the AI value chain could be impacted if ‘time to power’ increases,” according to the firm. For all vendors, “AI is expected to account for 1/3 of datacenter power by 2025.”

Analysts may have questions on whether AI spending cannibalizes spend on other technology areas, a topic that came up during the latest earnings call for Microsoft AI rival IBM.

In a sign of growing AI demand, Morgan Stanley found that the number of organizations with no plans to use AI or LLMs in the near future fell from 32 percent in the fourth quarter of 2023 to 11 percent last quarter and down to 6 percent in the most recent data.

The firm found that “75% of CIOs Say Recent Innovations In Generative AI & LLMs Are Having Direct Impacts to 2024 IT Investment Priorities” and that AI and ML “not only sustains positioning at the top of the priority list in 2Q24 but continues to widen its lead over other IT initiatives, increasing ~270 bps in net prioritization.”

Microsoft AI PCs, Chips, Devices

For the fourth fiscal quarter, Bank of America’s July 17 report predicted a $50 million upside to its $15.5 billion estimated revenue for Microsoft’s “more personal computing” segment – which includes Windows, Windows original equipment manufacturer (OEM) licensing, devices, gaming and advertising. That revenue would represent 11 percent growth year over year.

During the earnings call, Microsoft CEO Satya Nadella might give analysts an update on early traction for Microsoft’s Copilot+ PCs, which hit the market June 18.

In a July 18 report from Morgan Stanley, the firm called Copilot+ the likely “first major AI PC ‘killer app,’” providing users with a variety of AI models plus on-device AI assistants “that will only get smarter, more responsive and increasingly anticipatory over time.”

Morgan Stanley predicts AI PC penetration of 2 percent in 2024, crossing 20 percent penetration in 2025 and hitting about 65 percent in 2028.

The firm said that helping speed up AI PC adoption could be the emergence of lower price point AI PC chips over time to bring down the cost of AI PCs, along with “more attractive” use cases driving more enterprise purchasing.

AI edge devices hold long-term benefits for Microsoft and other vendors in the space, including “accelerating replacement cycles of devices” because “AI on-device requires high end hardware.”

Vendors such as Microsoft could also engage in “restricting features to top models and disabling backward compatibility” to bring “users onto new devices sooner” and even put new “applications behind a paywall.”

Morgan Stanley noted that “Global PC OEMs are using AI capability as a key selling point in new, premium models.”

However, risks to the AI PC story include “low adoption of new ‘killer Edge AI apps’ such as Copilot+” and “delays to new silicon launches from AMD/Intel could push out the AI PC penetration curve as all PC OEM’s are currently over-indexed to x86 architecture vs. Arm.”

AI PC vendors such as Microsoft could take a hit if customers “choose to reallocate budgets set aside for PC hardware in favor (of) higher-priced AI servers” and if “AI PC price points remain too elevated to drive adoption.”

“An overall shift in PC mix back towards desktops vs notebooks as more companies ask employees to return to work,” is another risk to the AI PC boom, according to Morgan Stanley.

Microsoft Cloud Growth

Bank of America’s July 17 report predicted Azure growth of 31.5 percent year over year, with AI contributing 8 percent.

Azure and Microsoft cloud products remain an important part of solution provider businesses, with Microsoft even announcing more than $150 million in pre-sales and post-sales investments for its Azure Innovate offering in the new fiscal year.

Morgan Stanley’s July 15 report said that confidence in Microsoft’s performance comes in part from CIOs telling the firm their “spending growth expectations for Microsoft increased to +6.6% – marking the highest level of growth expectations observed for Microsoft in our survey since 2Q21.”

The firm found that “of the CIOs who currently use or plan to use Azure, 60% expect to increase spend over the next 12 months, an uptick from 52% of CIOs in 2Q23.”

“Conversely, 30% of CIOs plan to spend flat or decrease spend on Azure in the next 12 months, a notable down tick from 40% of CIOs in 2Q23,” according to the firm.

Channel partners told Morgan Stanley about “healthy Azure migration trends, Azure AI Services being part of several development initiatives, and confidence on the M365 Copilot roll out remaining high despite some mixed initial feedback and customers in some cases limiting access in the beginning.”

CIOs have reported growing public cloud adoption to Morgan Stanley, saying that “40% of application workloads are running in the public cloud today, a notable uptick from 29% in 2Q23 and 36% in 4Q23.”

Channel partners told the firm that customer cloud spending has grown due to “migration projects ‘playing catch-up’ after slower migration trends for the 1H of last year” plus “development initiatives picking up in-line with prior years and scaling in-line with expectations.”

“In terms of new business (commitments), our partner checks were constructive on the full year growth outlook which moved up over the past six months, but were more cautious on the timing as partners cited deal timing in a few cases affected by the evaluation of AI strategies,” according to Morgan Stanley. “In some cases, customers stepped back from the deal table temporarily to engage services firms to assess the broader AI strategy before committing to larger commitments.”

Microsoft Productivity, AI Applications

Bank of America’s July 17 report predicted a $100 million upside to its estimate of $20 billion for Microsoft’s productivity and business processes (PBP) segment, which includes Office 365, Dynamics, LinkedIn and Copilot for Microsoft 365. That $20 billion would represent a 9 percent increase year over year.

Bank of America predicted 6 percent year over year increase to Office’s average selling price (ASP) due to “partner commentary for sustained strength in the premium E5 cycle, and early traction with Copilot upsell deals.”

“While channel commentary does not suggest Copilot is seeing significant incremental traction, 4 of 10 partners cited it as a driver of revenue growth in Q4, which is enough to achieve our base case for 1.7% penetration to the eligible E3/E5 base,” according to Bank of America.

Indeed, Microsoft is putting more resources into enabling partners around GenAI, revealing a tenfold increase to the Copilot partner investment as part of new fiscal year partner incentives.

GenAI improved in the Morgan Stanley survey, with the latest quarter showing “94% of CIOs expect to adopt Microsoft Generative AI products over the next 12 months (a significant uptick from 63% in 4Q23 and 47% in 2Q23) with 41% expecting to adopt Azure OpenAI Services (vs. 37% in 4Q23 and 27% in 2Q23), 40% expecting to adopt GitHub Copilot (vs. 17% in 4Q23 and 5% in 2Q23), and 25% expecting to adopt Security Copilot (vs. 8% in 4Q23 and 10% in 2Q23).”

“Looking ahead to the next 3 years, a similar 94% of CIOs plan to utilize AI products, suggesting this heightened level of product adoption to be durable on a go forward basis,” according to Morgan Stanley.

Copilot penetration, meanwhile, is “expected to reach a critical mass,” according to Morgan Stanley. “CIOs expect 21% of seats over the NTM and 46% over next 3 years,” the firm said, “and even on-prem server related product growth expectations inflected positively for the first time on record.”

Morgan Stanley saw signs of positive movement in Microsoft customers buying more expensive licenses, with “46% of CIOs using O365 expect to use E5 next year, compared to 27% of CIOs today.”

The firm also predicted “that Microsoft may aim to push more of the Copilot functionality into base SKUs and potentially create business or premium Copilot SKUs, which we would view as a positive as such a move could drive higher adoption near-term, set the foundation for price increases on base SKUs, and still leave a further upsell optionality into premium Copilot SKUs.”