Analysis: Microsoft’s F23Q3 (Premium)

Yesterday, Microsoft reported its financial results for the third quarter of its fiscal 2023. Here's a closer look at that quarter, with an emphasis on the Microsoft businesses we care about the most here at Thurrott.com: Windows, Xbox, Surface, and Microsoft 365.

As you may have seen, earned a net income of $18.3 billion (up 9 percent) on revenues of $52.9 billion (up 7 percent) for the quarter ending March 31. What you may not have seen is that these figures topped expectations, and that, as a result, Microsoft's stock price is currently racing towards its highest price in over a year. Wall Street liked what it saw.

But then, of course it would: Microsoft's financial successes of the past decade are all based on speculation about its cloud computing advances, speculation that has sent its stock price---and market capitalization---soaring. Thanks to this bit of marketing, Microsoft is now the second biggest company in the world, after only Apple, by market cap.

The downside to this success, to me, is that Microsoft talks a lot less about its legacy, non-cloud businesses because it emphasizing what Wall Street sees as the past would have a negative impact on its stock price and market cap: this is all about the future. And in my never-ending quest to figure out why Microsoft, the most conservative of Big Tech companies, would ever unleash unreliable and unsafe AI technology on the world, as it did this past March, I've come upon yet another theory, and it's tied to its marketing of cloud.

And it goes like this: Microsoft for years was able to tout 70 percent-ish growth in Azure revenues, a major contributor not just to its bottom line but to its ongoing success in the future. But Azure revenues eventually slowed, as they must. And with Wall Street getting increasingly edgy about ever-lower Azure growth, given that it's now a mature business, Microsoft needed to make a move that would excite Wall Street. And maybe that was part of the calculation behind unleashing its AI earlier than its AI ethics rules would have normally allowed. To that point, Azure (and other services) revenues grew only by only 27 percent in the quarter. That figure was 31 percent one quarter ago and 46 percent one year ago.

Granted, Intelligent Cloud, the Microsoft business that owns Azure, was still Microsoft's biggest. It contributed $22.1 billion in revenues in the quarter, up 16 percent year over year (YOY). Almost 42 percent of Microsoft's revenues overall came from this business.

Microsoft's other cloud-focused business unit, Productivity and Business Processes, delivered another $17.5 billion in revenues, up 11 percent YOY. This business, which includes most of Microsoft 365 (and all of Office), LinkedIn, and Dynamics, accounted for 33 percent of Microsoft's revenues. And while it's not fair to claim that all of Productivity and Business Processes' revenues come from the cloud, most do. Even a conservative estimate suggests that over 50 percen...