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Microsoft reported a 20% spike in quarterly profits Tuesday, helping to fuel its battle to get ahead of rivals like Google, Amazon, and Facebook parent Meta in selling the latest artificial intelligence technology.
The software giant said its fiscal fourth-quarter profit was $20.1 billion, or $2.69 per share, beating analyst expectations for $2.55 per share.
It posted revenue of $56.2 billion in the April-June period, up 8% from last year. Analysts polled by FactSet Research had been looking for revenue of $55.49 billion.
CEO Satya Nadella said the company remains focused on “leading the new AI platform shift,” though its push to add AI features to its existing products — among them cloud computing services, workplace software, and its Bing search engine — is not yet making an obvious mark on its financial results.
Microsoft was an early mover in this year’s hype around “generative AI” tools that can help people write documents and create new images and other media. It capitalized on its multibillion dollar investments in ChatGPT-maker OpenAI to launch a Bing chatbot and similar tools tailored to its business customers. It said last week that it would start charging $30 per user for business accounts that sign up for its new AI “Copilot” that integrates with existing software such as Word, Excel and email.
“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,” Nadella said in a prepared statement.
Despite beating Wall Street analyst expectations for profit and revenues, Microsoft’s stock dropped slightly in after-hours trading after it released its financial report upon the market’s close Tuesday.
Macquarie analyst Sarah Hindlian-Bowler said investors have been focused on Microsoft’s early revenue from those artificial intelligence investments, the performance of the Azure cloud computing platform, and the likelihood that Microsoft will close its deal to buy video game company Activision Blizzard, which could help boost gaming revenue and drive more users to the Xbox game system and other Microsoft platforms.
More than 18 months after announcing the $69 billion deal, Microsoft is still negotiating with a British antitrust regulator over concerns it will harm competition. The U.S. Federal Trade Commission also opposed the transaction but lost a court fight to stop it.
“We still expect a successful close as the company works toward an amenable solution that satisfies the U.K.’s concerns,” Hindlian-Bowler said in an analyst note ahead of Tuesday’s earnings.
Quarterly sales were highest in Microsoft’s cloud business segment, which the company said grew 15% from the same time last year to $24 billion. Much of that was driven by its flagship Azure platform “and other cloud services revenue,” which grew 26%.
Microsoft doesn’t reveal the total revenue for its Azure business, though a document inadvertently disclosed during its recent court fight with the FTC showed it as $34 billion last year, Hindlian-Bowler said. Microsoft has declined to comment on that number. It’s long been seen as the runner-up to Amazon’s dominant cloud platform, Amazon Web Services.
Microsoft’s second-biggest business segment — centered on productivity software led by its Office suite of workplace products — grew 10% to $18.3 billion in sales for the April-June quarter.
While AI has captivated the attention of the public and investors, Microsoft is also still heavily reliant on its personal computing business centered around the licensing fees paid by the makers of computers running its Windows software.
Microsoft made $13.9 billion from its personal computing business segment in the quarter, down 4% from the same time last year. While that segment also includes other products, including Xbox games and consoles, it’s been the Windows revenue dragging the overall numbers down.
Worldwide shipments of PCs from various manufacturers in the April-June quarter dropped 16.6% from the same time last year, marking the seventh consecutive quarter of year-over-year decline, according to market research group Gartner. However, the market is starting to stabilize and demand could grow again in 2024, Gartner said.
With most of its revenue coming from sales to business clients, Microsoft hasn’t been as affected by economic troubles that have hit consumer-focused sectors or advertising-dependent tech rivals like Google and Meta. But Microsoft has still laid off hundreds of workers in recent months, including many around its headquarters in Redmond, Washington, according to notices it sent to government agencies. That’s on top of the 10,000 employees, almost 5% of its workforce, that it cut earlier this year.
Alphabet's (GOOGL.O) second-quarter profit exceeded Wall Street expectations on Tuesday and the Google parent announced that its long-time CFO, Ruth Porat, would assume a new role while the company sought a new finance chief.
Alphabet's results were helped by steady demand for its cloud services and a rebound in advertising. The shares jumped 8% in after-hours trading. Shares of rival Microsoft (MSFT.O) were down slightly after it also reported results on Tuesday, while shares of Meta Platforms (META.O), a company also highly dependent on ad sales, rose as much as 2%.
"Not only did Google deliver fantastic earnings per share, exceeding expectations at a time when investors were questioning its ability to keep up with other tech giants amid the AI frenzy, it also did so by a considerable margin," said Thomas Monteiro, senior analyst at Investing.com. "This strongly indicates that a new growth phase for the giant is likely underway."
He added, "Google has finally consolidated itself as a leading force in the highly-disputed cloud sector and now has room to focus its expansion in the AI field."
Porat, hired in 2015, is one of Silicon Valley's most prominent female executives and oversaw tremendous growth at Alphabet. She will become chief investment officer and president starting Sept. 1 and lead 2024 planning while her successor is sought.
Porat was hired from Morgan Stanley (MS.N), where she was finance chief. In her new role, she will oversee the company’s so-called Other Bets portfolio, the unit for more risky hardware and services ventures, as well as help manage the company’s global investments.
Advertisers, who make up a big share of Alphabet's revenue, have pulled back on spending precious dollars on untested platforms, helping the Google parent as well as Facebook owner Meta Platforms.
But Alphabet's second-quarter results are sure to please investors concerned over a broader advertiser pullback following the meteoric growth of Web services during the pandemic, as consumers returned to physical retail.
Silicon Valley has been buzzing over generative artificial intelligence software that can give long-winded responses to user queries and is predicted to be the next leap forward for Big Tech. Alphabet rolled out AI products at its annual I/O developer conference in May and it revamped its search engine to include generative AI.
The new AI technology comes at a cost: the largest component of Alphabet's second-quarter capital spending was for servers and a "meaningful investment" in AI computing, Porat said in a conference call.
Advertising is coming to the company's revamped search, Chief Executive Sundar Pichai told analysts on the call. Alphabet is testing what formats are effective and where to place ads inside of its AI-powered search.
Presently, 80% of advertisers use at least one AI-driven search product, Chief Business Officer Philipp Schindler said on the call.
The company plans to integrate generative AI into other products such as Gmail, Google Photos, and its Android mobile operating system. Generative AI tech can create text, images and video that resemble what people produce.
Still, the results released on Tuesday show that ad sales are still king. Investors punished social media company Snap (SNAP.N) on Tuesday for its disappointing ad sales in the quarter.
Revenue at Google Cloud, which is among the biggest cloud service providers, rose 28% to $8.1 billion, besting expectations of $7.75 billion, and maintaining roughly the same rate of growth as the first quarter. Microsoft's Azure revenue rose 26%, ahead of the growth estimate from Visible Alpha.
Analysts and industry experts have said they expect cloud business growth to pick up toward the end of the year, with quarter-ended June being the trough as macro uncertainty begins to clear.
Investors expect AI to become a major growth driver for cloud businesses within a year, with Microsoft's Azure leading the pack followed by Amazon.com's (AMZN.O) AWS and Google Cloud.
Ad sales for Google's YouTube video service unit rose 4.4% to $7.67 billion.
Alphabet reported a net profit of $1.44 per share for the April-June period, compared with estimates of $1.34 per share.
Revenue for the quarter stood at $74.6 billion, compared with estimates of $72.82 billion, according to Refinitiv data.
Spotify (SPOT.N) is caught between the expectations of investors and major music labels. The $27 billion Swedish music-streaming company on Tuesday unveiled its earnings for the three months to June 30. The good news is that its adjusted operating loss of 112 million euros ($124 million) was less than in the same quarter last year. The number of subscribers is still rising fast. But investors were more interested in what Chief Executive Daniel Ek had to say about the future, following Monday’s announcement that he is increasing prices for some premium subscribers. One bullish argument for Spotify’s stock is that higher prices will mean higher margins over time.
On that score, Spotify disappointed on Tuesday. Ek said the gross margin in the three months to Sept. 30 would be 26%, which is only a slight improvement from the last quarter’s 24%. And he didn’t give any encouraging longer-term signals. Shares in Spotify dropped 12%.
There are two reasons for hope. First, some of Spotify’s customers pay annually, which means the price hike might take a while to come through. Second, Ek has a good reason to stay coy. He’s locked in a long-term standoff with major labels like Universal Music Group (UMG.AS), which currently grab the overwhelming majority of Spotify’s revenue. If the streamer sounds too positive about the trajectory of its margins, the labels might see it as an invitation to play hardball. In other words, Spotify’s future may be rosier than Ek is willing to let on.