AI Boosts Microsoft To Its Best Quarter Ever Even As Xbox Hardware Sales Tumble

A building with a Microsoft sign in front of a blue sky.
Forget about shrinking PC shipments, tough economic conditions, and every other challenge that technology companies face. The industry is in the early stages of an artificial intelligence (AI) gold rush, and partially for that reason, Microsoft just reported its strongest quarter ever in its 48-year history with record figures in sale and profits.

For the quarter ended June 30, 2023, Microsoft generated $56.2 billion, which is an 8% gain compared to the same quarter a year ago. Net income saw even bigger growth, increasing 20% year-over-year to $20.1 billion during the fourth quarter of Microsoft's fiscal 2023. Previous sales and profits records stood at $52.9 billion (last quarter) and $18.8 billion (Q4 of 2021), respectively.

Microsoft's been busy infusing AI into its varied products and services, such as Windows Copilot, GitHub Copilot, Bing Chat, Azure AI services, and so forth. Most of the AI push is in the early stages, meaning Microsoft could be on track to see more record quarters as time goes on.

Slide of Microsoft' FY23 Q4 financial summary.

"Organizations are asking not only how—but how fast—they can apply this next generation of AI to address the biggest opportunities and challenges they face—safely and responsibly," said Satya Nadella, chairman and chief executive officer of Microsoft. "We remain focused on leading the new AI platform shift, helping customers use the Microsoft Cloud to get the most value out of their digital spend, and driving operating leverage."

Not every segment is doing gangbusters, though. Microsoft said its Xbox hardware sales fell by 13% "driven by lower volume of consoles sold." Even so, Microsoft still managed to nudge its gaming revenue by 1% to $36 million, with third-party content and Xbox Game Pass pushing content and revenue up 5%.

Meanwhile, Windows revenue decreased $337 million as a result of a 12% drop in Windows OEM sales, which itself was caused by "continued PC market weakness." It could have been an even steeper decline, but was instead somewhat offset by hardware makers stocking up early on back-to-school inventories.

Meanwhile, Microsoft saw a 27% jump in sales for Azure, which is also poised to benefit from AI.

Azure continues to take share, as customers migrate their existing workloads and invest in new ones... And Azure AI is ushering in new, born-in-the cloud AI-first workloads, with the best selection of frontier and open models, including Meta’s recent announcement supporting Llama on Azure and Windows, as well as OpenAI. We have great momentum across Azure OpenAI Service," Nadella stated during a conference call.

Looking beyond its fourth quarter results, Microsoft anticipates Azure and other cloud services revenue to climb 25-26% next quarter. It also expects its Windows OEM revenue to decline in the mid-to-low teens next quarter, and its gaming revenue to grow in the mid-single digits.

None of these (including gaming) take into account the pending buyout of Activision Blizzard, which is on track after the FTC lost its lawsuit to block the deal.