Microsoft’s ad revenues surge 19% in latest quarter—but AI-fueled engagement has yet to fully pay off

By the numbers: Microsoft reported results for its Q4 FY24, which ended June 30, on Tuesday.

• Revenues were $64.7 billion, up 15% year over year.
• Net income was $22 billion, up 10% YoY.
• Search and news advertising revenues, excluding traffic acquisition costs, increased by 19%. This segment contributed to overall revenues of $15.9 billion for the More Personal Computing division, which jumped 14%.

While the company’s cloud and AI services continued to drive growth—with Azure reporting a 29% revenue increase and gaming revenues rising 61% due to the Activision Blizzard acquisition—the advertising segment showed a solid performance, demonstrating resilience in a competitive market.

Why it matters: Microsoft’s search and advertising business is a critical component of its strategy to diversify revenue streams beyond its traditional software and cloud services.

• The 19% growth in this segment underscores the effectiveness of Microsoft’s investments in Bing and other advertising initiatives, as well as the integration of AI technologies to enhance ad targeting and user engagement.
• This growth is particularly significant as it demonstrates Microsoft’s ability to compete in the digital advertising space that is dominated by Google, Meta, and Amazon.
• Despite increasing scrutiny on data privacy and regulatory challenges, Microsoft’s strong performance in advertising highlights its potential to capture market share—albeit slowly—and drive growth.

In context: Microsoft’s standout performance in search and advertising reflects broader trends in digital marketing and the company’s strategic focus on using AI to improve ad efficacy.

• The growth in advertising revenues comes as the overall tech sector faces hurdles. Google parent Alphabet recently reported middling results, adding pressure on Microsoft to demonstrate upside potential in its ad business.
• OpenAI’s new AI search engine, SearchGPT, could slow Microsoft’s inroads into the lucrative search market.
• The company faces other challenges as it tries to become a more meaningful ad player. Next year will see Netflix end its partnership with Microsoft in favor of developing its in-house advertising platform; meanwhile, its Xandr advertising subsidiary faces GDPR complaints.

Our take: Microsoft’s search and advertising growth is a promising indicator of its ability to innovate and compete in digital advertising.

• The company continues to build partnerships with news and entertainment publishers, paying them $1 billion over the past five years to reach new audiences. But it needs to show these efforts will help them make inroads into Google’s gargantuan lead in the space.
• CEO Satya Nadella highlighted on the earnings call that users have created over 12 billion images and conducted 13 billion chats using Copilot for the web, showcasing strong engagement. The challenge will be to now translate that engagement into ad revenues.