Analysis: Microsoft’s F23 Q4 and the Impact of AI (Premium)

Yesterday, Microsoft reported its financial results for the final quarter of its fiscal 2023. Here's a closer look at that quarter, with an emphasis on the consumer businesses we care about the most about here at Thurrott.com, and whether or how the cost of AI is starting to hit the bottom line.

First, the hard numbers: Microsoft earned a net income of $20.1 billion on revenues of $56.2 billion in the quarter ending June 30 and a net income of $72.4 billion on revenues of $211.9 billion in the fiscal year with the same end date. In both cases, Microsoft experienced double-digit gains in net income (profit) and single-digit gains in revenues (earnings). Microsoft is, of course, the second-biggest company in the world by market capitalization and it appears to be doing pretty well. Ahem.

As you probably know, Microsoft has three top-level business units, and their relative sizes and positions compared to each other have changed much: Intelligent Cloud read: Azure), its biggest business, and Productivity and Business Processes (Microsoft 365/Office), its second, are both on growth trajectories, while More Personal Computing (Windows, Surface, Xbox) continues its decline.

That requires discussion: I was hoping to see improvements to Microsoft’s Windows business in particular, with the idea that we’re surely starting to come out of the post-pandemic PC slump, but that is very much not the case. Surface tanked hard, with no explanation at all. And Xbox continues hovering in the same place as ever, with declines in hardware revenues and minor growth in content revenues. This is the part of Microsoft that I, and I assume most of you, care about the most. What’s going on?

When I wrote the news article about Microsoft’s earnings yesterday, all I had to go on was its public filings, which include a press release, a presentation with high-level details about each of its three business units, and some other documents. But this morning, I can reference the post-earnings conference call that Microsoft held with analysts and the press and provide a bit more nuance and detail. So let’s dive in.
Windows
Windows is top of mind here, and this business has been struggling along with everything else related to PCs, including PC makers like Lenovo and HP and chipset makers like Intel and AMD. As noted, I keep looking for a light at the end of this slump tunnel the PC market is in. And while there have been some hopeful notes from analysts and PC makers, in particular, we have yet to see those positive thoughts translate into real-world gains.

Case in point, Windows, which sits right at the heart of the PC business.

Windows revenues from PC makers fell 12 percent in the quarter year-over-year (YOY) “primarily driven by the PC market,” Microsoft noted vaguely. And it would have been worse had it not been for an “early back-to-school inventory build” that offset the loss by 7 points. In the previous sequential quarter, Windows ...