Microsoft, Google earnings get soft landing from AI cloud cushion

Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOGL) reported strong cloud and artificial intelligence (AI) growth in their quarterly financial results on Tuesday. But for both companies, growth is slowing.

In Microsoft’s fiscal Q4 (ended June 30, 2023), Azure cloud revenue growth slowed to 26% from 27% in the previous quarter and 40% in the year-ago quarter. Azure growth has declined sequentially every quarter since at least Q3 2022. 

The company does not break out Azure revenue but sales in its Intelligent Cloud business, which includes Azure, grew 15% year on year to $24 billion.

Microsoft CEO Satya Nadella emphasized the positive in an analyst call Tuesday.

“We had a solid close to our fiscal year. The Microsoft Cloud surpassed $110 billion in annual revenue … with Azure all up accounting for more than 50% of the total for the first time,” Nadella said.

He added that every customer he speaks with is keenly interested in applying “next-generation AI to address the biggest opportunities and challenges they face and do it safely and responsibly.”

Overall, Microsoft revenue rose 8% to $56.2 billion year-over-year in the fiscal fourth quarter ending June 30. Net income was $20.1 billion, up 20%, and earnings per share was $2.69, up 21%.

For the fiscal year 2023, Microsoft revenue was $211.9 billion, up 7%, the lowest rate of annual growth since 2017.

Microsoft expects gradual revenue growth from increased demand for AI services, with the impact hitting in the second half of the 2024 fiscal year — six months out or more.

“Even with strong demand and a leadership position, growth from our AI services will be gradual as Azure AI scales and our Copilots reach general availability dates,” Microsoft CFO Amy Hood said on the analyst call.

Microsoft Copilot: An on-ramp for AI

Copilot is a suite of AI assistants for Microsoft software products, already available for Microsoft developer products and services, including GitHub and Visual Studio Code. Copilot for Microsoft 365 productivity applications is in the pipeline — though Microsoft has not disclosed a release date — priced at $30 per person per month. Early access for Copilot for Microsoft 365 is already available.

Microsoft sees Copilot as an on-ramp for companies getting started in AI, Nadella said.

Asked on the call whether declining Azure revenue growth had bottomed, Microsoft management didn’t respond directly.

“[It’s] still early innings of the cloud migration itself, so there’s a lot there still,” Nadella said. “And then on top of that, there’s this complete new world of AI driving a set of new workloads.”

Nadella sees Copilot as the “third pillar” of Microsoft’s business, alongside creation tools and communication and collaboration services.

Major cloud providers Microsoft, Amazon and Google are seeing customers adjust workloads to reduce costs, prompted by concerns about a worsening economy. And the cloud providers are tightening their belts accordingly. Microsoft’s R&D costs declined year-over-year for the first time since 2016, and the company is cutting jobs.

Alphabet sees strong growth

Elsewhere, Google parent Alphabet said Tuesday that revenue from its cloud products, including Google Cloud Platform and Google Workspace, increased 28% to about $8 billion, for its second straight profitable quarter after the company posted its first-ever profit in Q1.

However, as at Microsoft, Google Cloud’s growth rate slowed, dropping from the 35% year on year gain it saw between Q2 2021 and Q2 2022.

Consolidated Alphabet revenue was $74.6 billion in Q2, up 7% year-over-year. Net income was $18.4 billion.

AI is helping drive growth, particularly customers using Google Cloud Platform infrastructure to train and deliver generative AI models, Google and Alphabet CEO Sundar Pichai said on an earnings call Tuesday.

Demand for generative AI is “expanding our total addressable market and winning new customers,” Pichai said.

Indeed, New Street Research’s Dan Salmon wrote in a note to investors “Cloud growth deceleration moderated significantly despite continued customer spend optimizations, as the company’s AI capabilities are attracting new customer demand.”

Alphabet’s strong results vindicate the company direction, and contradict naysayers earlier this year who predicted Alphabet would get hammered by Microsoft’s early lead in AI, Infinite Retina analyst Robert Scoble, said on Twitter. “Google/Alphabet tells those of us who thought Google had a business model problem due to the popularity of @openAI’s GPT to sit down and shut up.”

Amazon will report earnings next week.