Microsoft CEO Satya Nadella was named this week as CRN’s No. 1 Most Influential Executive of 2024.

Microsoft executives came armed with data to show a growing artificial intelligence business and assurances that the vendor’s growing expenses to meet AI demand are done responsibly during the tech giant’s fiscal 2024 fourth quarter earnings call Tuesday.

CEO Satya Nadella told listeners on the Redmond, Wash.-based vendor’s call – covering the quarter and fiscal year ended June 30 – that its Copilot generative AI software-as-a-service (SaaS) offering “is on a growth rate that’s faster than any other previous generation of software we launched as a suite” in the Microsoft 365 collection of applications and services.

The number of Copilot customers increased more than 60 percent quarter over quarter, the CEO said. The number of Copilot customers with more than 10,000 seats more than doubled quarter over quarter. “That to me is a healthy SaaS core business,” said Nadella – named this week as CRN’s No. 1 Most Influential Executive of 2024.

[RELATED: Satya Nadella Has Microsoft In The AI Driver’s Seat]

Microsoft Q4 2024

Microsoft has more than 400,000 partners worldwide and is a member of CRN’s 2024 Channel Chiefs.

Microsoft has been drinking its own champagne when it comes to AI transformation, with Nadella telling call listeners “we ourselves are on course to save hundreds of millions of dollars in our own customer support and contact center operations.”

“We can drive that value to our customers,” he said.

Repeated Themes From MCAPS

On the call, Nadella reiterated some major themes that came out of its digital MCAPS Start for Partners event held earlier in July to prepare solution providers for the new fiscal year, including the opportunity for Microsoft in cloud migrations.

“We remain the hyperscale cloud of choice for SAP and Oracle workloads,” Nadella said on the call. “Atos, Kohl’s, Daimler Truck AG, Domino’s, Helion, for example, all migrated their mission-critical SAP workloads to our cloud. And with our Azure VMware solution, we offer the fastest and most cost-effective way for customers to migrate their VMware workloads, too.”

During MCAPS Start for Partners, Judson Althoff – Microsoft’s executive vice president and chief commercial officer – thanked virtualization and desktop-as-a-service rival VMware for a boom Microsoft and its partners have seen in the cloud migration business.

“Everyone wants to get off of VMware and get into the cloud,” Althoff said during the event, named for the tech giant’s Microsoft Customer and Partner Solutions organization. “VMware has given the world the greatest gift of all.”

Nadella also referenced the MCAPS themes of AI design wins where partners bring together a stack of Microsoft AI products and services across multiple layers including the app and data layers.

Nadella told listeners that “50 percent of the folks who are using Azure AI are also using a data meter.”

“That’s very exciting to us because the most important thing in Azure is to win workloads in the enterprise,” he said. “And that is starting to happen. And these are generational things once they get going with you.”

Copilot Changing Worker Thinking

Nadella told listeners on the earnings call that he sees Copilot for Microsoft 365 creating “a new design system for knowledge and frontline work to drive productivity, which will be very akin to what has happened in software engineering,” but in the areas of marketing, finance, sales and customer service.

Copilot for M365 users are replicating the GitHub Copilot workspace design system of starting with an issue, then creating a plan and a spec and finally a repository, he said.

A sales employee may get an email, for example, and the email data is context for a prompt that the user expands upon by adding in customer relationship management (CRM) data, generating a reply with that data. In Copilot Studio, users can use more data for grounding and completing workflows.

“If this email comes from this customer whose order date has got a particular issue with it, you can then go and escalate it to somebody else who gets a notification in Teams,” Nadella said. “Those are the kinds of workflows that are getting built within IT or by end users themselves. What used to be line-of-business applications to us are Copilot extensions going forward.”

As usual for Nadella on earnings calls, he provided new data points on user adoption of Copilot and other AI offerings from the tech giant.

In Copilot, Microsoft saw:

• A majority of enterprise customers returning to purchase more Copilot for Microsoft 365 seats
• GitHub Copilot has more than 77,000 organization adopters, up 180 percent year over year
• GitHub Copilot accounted for more than 40 percent of GitHub revenue growth in the fiscal year – which came out to an annual revenue run rate of $2 billion
• GitHub Copilot, arguably the first generative AI application of this era, “is already a larger business than all of GitHub was when we acquired it,” the CEO said
• The number of people who use Copilot for Microsoft 365 daily at work nearly doubled quarter over quarter
• 50,000 organizations have used Copilot Studio, up more than 70 percent quarter over quarter
• More than 400 health care organizations have purchased Nuance’s DAX Copilot to date, up 40 percent quarter over quarter
• The number of AI-generated clinical reports more than tripled
• More than 1,000 paid customers used Copilot for Security
• Copilot for the web users have made more than 12 billion images and conducted 13 billion chats to date, up 150 percent since the start of the calendar

As for other Microsoft AI offerings, the vendor reported:

• Azure AI customers now number more than 60,000, up nearly 60 percent year over year
• The number of Azure AI customers who also use data and analytics tools grew nearly 50 percent year over year.
• Paid models-as-a-service customers more than doubled quarter over quarter
• The Microsoft Fabric AI-powered data platform now has more than 14,000 paid customers, up 20 percent quarter over quarter
• More than 480,000 organizations have used AI-powered capabilities in Power Platform, up 45 percent quarter over quarter

Nadella added that Microsoft had 48 million monthly active users of Power Platform, up 40 percent year over year, and Dynamics 365 Business Central now has more than 40,000 organizations using it for core enterprise resource planning (ERP).

Microsoft now has 36,000 Azure Arc hybrid and multi-cloud management customers, up 90 percent year over year. Defender for Cloud, Microsoft’s cloud security offering, surpassed $1 billion in revenue over the past 12 months, Nadella said.

Microsoft Teams Premium has surpassed 3 million seats, up nearly 400 percent year over year, the CEO said. Microsoft’s security segment now has 1.2 million customers. And more than 800,000 security customers used four or more workloads, up 25 percent year over year.

Lack Of AI PC Details

Microsoft’s first earnings call since Copilot+ PCs went up for sale was scarce on specifics, but Nadella did tell listeners that “we are delighted by early reviews, and we are looking forward to the introduction of more Copilot+ PCs powered by all of our silicon and OEM partners in the coming months.”

Windows 11 active device sales increased 50 percent year over year, Nadella said.

For the fiscal quarter, Microsoft’s “more personal computing” segment brought in $15.9 billion for the quarter, up 15 percent year over year. This segment includes Windows, Windows original equipment manufacturing, Windows Commercial, devices, Xbox and news advertising revenue.

Windows revenue increased 8 percent year over year ignoring foreign exchange. Windows OEM revenue grew 4 percent. Windows Commercial products and cloud services revenue increased 12 percent. Devices revenue fell by 9 percent, according to Microsoft. Microsoft CFO Amy Hood described the PC market as meeting expectations.

Hood told listeners on the call that she expects revenue from the more personal computing segment to grow next quarter between 9 percent and 12 percent year over year, $14.9 billion to $15.3 billion.

Windows OEM revenue growth should be flat, akin to the PC market. Windows commercial products and cloud services revenue should grow mid-single digits. Devices revenue should grow low- to mid-single digits.

Addressing AI Cost Concerns

Much of Thursday’s call focused on Microsoft’s capital expenditures to meet AI demand. Nadella said that AI, like cloud, is “a knowledge-intensive and capital-intensive transition.”

Microsoft is focused on innovation across the product portfolio while “using customer demand signal and time-to-value to manage our cost structure dynamically and generate durable, long-term operating leverage,” he said.

Hood added that about half of the CapEx for the fourth fiscal quarter and the entire 2024 fiscal year “is really on land and build and finance leases, and those things really will be monetized over 15 years and beyond.”

“They’re incredibly flexible,” Hood said on the call. “We built a consistent architecture – first with the commercial cloud and second with the Azure stack for AI – regardless of whether demand is at the platform layer or at the app layer or through third parties and partners or, frankly, our first-party SaaS, it uses the same infrastructure.”

That infrastructure makes “margins start off better and, obviously, scale consistently,” Hood said.

Microsoft is “focused on … building out this network in parallel across the globe,” she said, taking a different approach to AI than the region-by-region build out of cloud. “Because we have demand on a global basis, we are doing it on a global basis, which is important. We have large customers in every geo. And so hopefully with that shape of our capital expense, it helps people see how much of that is sort of a near-term monetization driver as well as much longer duration.”

Hood told industry analysts on the call that if AI demand starts to change, “we can throttle that investment on the CPU [central processing unit] side, which we’ve done for, I guess, a long time at this point,” she said. “And we’ll use all that same learning and demand signal and understanding to do the same thing on the GPU [graphics processing unit] side.”

Hood warned analysts on the call that they may see “a growing distinction” between CapEx and property, plant and equipment (PPE) cash during the AI rampup due to leases. During the quarter, Microsoft spent $19 billion in capital expenditures, including leases. Cash for property, plant and equipment (PPE) was $13.9 billion.

“Cloud- and AI-related spend represents nearly all of our total capital expenditures,” Hood said. “Within that, roughly half is for infrastructure needs where we continue to build and lease data centers that will support monetization over the next 15 years and beyond. The remaining cloud and AI related spend is primarily for servers, both CPUs and GPUs, to serve customers based on demand signals.”

Microsoft also only scales its AI training spend “as we see the demand accrue in any given period of time,” Nadella said.

“I would say it’s more important to manage to capture the opportunity with the right product portfolio that’s driving value,” he said. “And on that front, I feel good about the breadth of Microsoft’s offering, whether it’s on the consumer side, whether it’s on the commercial per-seat side or on the consumption meters. That’s, I think, the fundamental driver.”

Nadella also said on the call that, as with cloud, Microsoft is getting “the right mix of … infrastructure meters as well as SaaS applications.”

“That’s the first thing that we’re looking at, and how is that value landing with customers and what’s the growth rate,” he said.

Q4 In Depth

Hood said that commercial bookings of 19 percent growth year over year ignoring foreign exchange “were much better than we expected going into the quarter.”

The quarter came with “record commitment,” which was “driven by growth in the number of $10 million-plus and $100 million-plus contracts for both Azure and Microsoft 365 and consistent execution across our core annuity sales motions.”

“Commitments were very good, execution across both the core annuity renewal motion was good, as expected,” she said on the call. “The larger long-term commitments were better than we expected.”

Microsoft’s commercial remaining performance obligation (RPO) increased 21 percent ignoring foreign exchange to $269 billion, Hood said. About 40 percent of the money Microsoft will recognize as revenue in the next 12 months, up 18 percent year over year. The amount Microsoft will recognize as revenue after 12 months grew 21 percent.

Microsoft’s revenue for the fourth quarter was $64.7 billion, up 16 percent year over year ignoring foreign exchange. Microsoft Cloud brought in revenue of $36.8 billion for the quarter, up 22 percent year over year.

Microsoft’s productivity and business processes (PBP) business segment brought in $20.3 billion for the quarter, an increase of 12 percent year over year ignoring foreign exchange. This segment includes Office 365, Microsoft 365 Consumer, LinkedIn and Dynamics.

Office Commercial products and services revenue grew by 13 percent year over year ignoring foreign exchange, according to Microsoft. O365 Commercial revenue grew 14 percent with average revenue per user (ARPU) “growth primarily from E5 [license] momentum as well as Copilot for Microsoft 365,” Hood said.

Paid O365 commercial seats grew 7 percent year over year with installed base expansion across all customer segments, she said. “Seat growth was again driven by our small and medium business and frontline worker offerings, although both segments continued to moderate.”

Office Commercial licensing declined 7 percent ignoring foreign exchange, she said, reflecting customer shift to cloud offerings. Office Consumer products and cloud services revenue was up 4 percent year over year. M365 Consumer subscribers reached 82.5 million, a growth of 10 percent year over year.

Dynamics products and cloud services revenue grew 16 percent year over year. Dynamics 365 revenue increased 20 percent. “We saw continued growth across all workloads and better-than-expected new business,” Hood said. “Dynamics 365 now represents roughly 90 percent of total Dynamics revenue.”

Microsoft’s “intelligent cloud” business segment – which includes Microsoft Partner Network, Azure, SQL Server, Windows Server, Nuance and GitLab – brought in $28.5 billion for the quarter, an increase of 20 percent year over year ignoring foreign exchange.

Server products and cloud services revenue increased 22 percent year over year. Azure and other cloud services revenue grew 30 percent. “Azure growth included eight points from AI services, where demand remained higher than our available capacity,” Hood said.

The on-premises server business saw revenue increase 3 percent year over year ignoring foreign exchange, driven by hybrid demand, Hood said. Enterprise and partner services revenue decreased 7 percent, mostly due to a tough comparable year over year.

Microsoft’s Enterprise Mobility and Security (EMS) installed base grew 10 percent year over year to more than 281 million seats. The vendor saw “continued impact from moderated growth in seats sold outside the Microsoft 365 suite,” Hood said. “Therefore, our Azure consumption business continues to grow faster than total Azure.”

For the 2024 fiscal year, Microsoft reported $245.1 billion in revenue, an increase of 15 percent year over year ignoring foreign exchange. Microsoft Cloud revenue surpassed $135 billion, up 23 percent year over year, Nadella said on the call.

Microsoft’s stock fell about 3 percent after hours Tuesday, trading at about $411 a share.

Q1 And FY 2025 Estimates

For the 2025 fiscal year, Hood said that she expects “double-digit revenue and operating income growth as we focus on delivering differentiated value for our customers.”

She also expects higher CapEx compared to the prior fiscal year “to meet the growing demand signal for AI and cloud products.”

“These expenditures are dependent on demand signals and adoption of our services that will be managed through the year,” she said.

Disciplined spending by Microsoft means operating expenses should only grow in the single digits in the 2025 fiscal year, Hood said. Operating margins for the year should fall by only one point year over year.

However, AI infrastructure scaling expenses should eat into Microsoft Cloud gross margin percentage, with Hood expecting that percentage to reach 70 percent. She expects “capacity constraints, particularly on AI and Azure” will continue into the first half of the current fiscal year.

The vendor has “signed up with third parties to help us as we are behind with some leases on AI capacity,” Hood said. “We’ve done that with partners who are happy to help us extend the Azure platform to be able to serve this Azure AI demand. And you do see us investing quite a bit … in build so that we can get back in a more balanced place.”

Nadella added that the current strategy “is no different than leases that we would have done in the past.”

Hood expects PBP segment revenue to grow between 10 percent and 11 percent year over year ignoring foreign exchange to $20.3 billion to $20.6 billion.

Office 365 revenue should grow by about 14 percent year over year. The on-premises business should decline in the mid- to high- teens. Office Consumer revenue should grow low- to mid-single digits. Dynamics revenue should grow in the low- to mid-teens.

For the intelligent cloud segment, revenue should grow between 18 percent and 20 percent to $28.6 billion to $28.9 billion. Azure first fiscal quarter revenue should grow between 28 percent and 29 percent year over year. In the second half of the fiscal year, “we expect Azure growth to accelerate as our capital investments create an increase in available AI capacity to serve more of the growing demand,” Hood said.

Growth in Microsoft’s per-user business will continue to moderate, Hood said. On-premises server business revenue should decline in low-single digits. Enterprise and partner services revenue should decline in the low-single digits.