Microsoft gaming revenue increases 61% as cloud and AI take center stage

Recap: Microsoft’s revenue grew 16 percent year-over-year to $65.6 billion in Q1 FY25, surpassing consensus analyst projections of $64.5 billion. Operating income rose 14 percent to $30.6 billion, while net income increased by 11 percent, reaching $24.7 billion. Diluted earnings per share climbed 10 percent to $3.30.

Key drivers of growth included cloud computing, AI, and gaming, even as traditional revenue streams like consumer software and hardware took a backseat. Microsoft’s Intelligent Cloud division, encompassing Azure, grew 20 percent year-over-year to $24.1 billion, with the majority of gains from the commercial sector. Revenue from Microsoft 365 commercial products and cloud services increased by 13 percent, while consumer products and cloud services revenue rose a more modest five percent.

A standout growth area this quarter was Xbox content and services, which surged by 61 percent YoY, largely due to the Activision acquisition. The gaming division also benefited from a price hike for Xbox Game Pass Ultimate and the release of Call of Duty: Modern Warfare III on Game Pass, both of which likely contributed to increased earnings.

Search and news advertising revenue grew by 18 percent, while LinkedIn revenue increased by 10 percent. Windows OEM and Devices revenue saw a marginal two percent increase; although Windows OEM showed some actual growth, Devices revenue declined compared to the previous year.

During the earnings call, CEO Satya Nadella emphasized Microsoft’s commitment to AI, particularly in enhancing Copilot. He highlighted how the company is acquiring new AI customers by helping them “drive new growth and operating leverage.” Nadella also announced that Microsoft’s AI business is on track to exceed a $10 billion annual run rate this quarter.

The last quarter was a mixed bag for Microsoft. While its Intelligent Cloud division, AI, and gaming businesses generated substantial revenue, there were notable PR setbacks, including a widespread CrowdStrike outage that led to 8.5 million Windows devices crashing worldwide. This was due to a faulty CrowdStrike update, which affected less than one percent of all Windows machines globally but still caused major issues for retailers, banks, airlines, and their customers.