Microsoft's AI investment stabilizes its cloud business

Microsoft

On Tuesday, the company reported a strong quarter of sales. This shows that corporate customers are no longer worried about spending big in an uncertain economy. The results showed that investments in generative AI were starting to boost sales.

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Sales of $56.5 billion were achieved in the three-month period ending in September. This is an increase of 13% compared to a year ago. Profits reached $22.3 billion, a 27% increase. Microsoft and analysts' expectations were surpassed. Microsoft told investors AI would not start to produce meaningful results until 2024 when more products are widely available. Both Microsoft and its competitors want to integrate generative AI in nearly all of their products. Microsoft is viewed by many as a leader in AI, thanks to the $13 billion it invested in OpenAI and its partnership. OpenAI introduced the ChatGPT chatbot almost a full year ago. Azure, Microsoft's flagship product for cloud computing, grew by 29% in the last quarter, up from just 26%. Azure's growth was attributed to generative AI, which includes the GPT-4 language model that Microsoft offers. This is more than what the company told investors. Satya Nadda, Microsoft's CEO, told investors that more than 18,000 companies use Microsoft's Azure openAI services. He added that this included customers who hadn't used Azure before.

Nadella stated that "Azure took share again as organizations moved their workloads to the cloud." Microsoft's stock price rose by about 4% after-hours. Microsoft said its sales could rise as much as 8,7% in the current third, surpassing investor expectations. It also announced that it would invest in data centers in order to meet the demand for AI, cloud computing, and other technologies. Cloud computing users have become more cautious in their spending, as they try to minimize their costs amid an uncertain economy. Microsoft and its competitors are facing a tight budget even though they've been racing to the forefront of AI.

Microsoft Commercial Cloud Subscriptions for its Productivity Suite, including

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Word and Teams grew 18% during the first quarter. Microsoft's "Copilot", a generative AI, will be integrated into these products and made widely available for commercial customers starting next month. UBS described this as "the most anticipated GenAI software application launch".

Nadella stated that 40% of Fortune 100 companies had been testing this offering in a limited preview and "so, so good." The company launched a chatbot in February that was integrated with its Bing search engine. UBS said this month that there was "no evidence Bing gained any market share in search". In the last quarter, search and news advertising grew by 10%. Brett Iversen said in an exclusive interview that the company still views this as a "long-term play". Microsoft's personal computer business grew only 3% to $13.7 billion. This reflects the shift in consumer behavior since the laptop buying binges during the pandemic. Windows revenue on new computers increased by 4%. Xbox content and services grew 13%. Gaming was a bright spot for consumers. Iversen noted that the release of Starfield by Bethesda Game Studios (which Microsoft acquired in 2020) provided a noticeable boost. Microsoft's $69 Billion deal to purchase video game maker Activision is not included in the results, which run until the end of September. This deal was closed on October 13th after Microsoft had turned the tide of 21 months' regulatory scrutiny. Microsoft acquired LinkedIn in 2016 and revenue for the professional social network grew only 8% in the first quarter to $3.9 billion. LinkedIn's growth in sales slowed down, especially for its recruiter products. Last week, it announced its second round of layoffs this year. Microsoft announced this month that the Internal Revenue Service, after a decade-long audit, determined that Microsoft owed $28,9 billion in back tax for 2004 to 2013 Microsoft and the IRS have been at odds over how Microsoft shifted its profits abroad. Microsoft announced that it would appeal the findings, a lengthy process which could last years.