HomeTechnologyArtificial intelligenceMicrosoft bets on AI to drive next wave of cloud, revenues

Microsoft bets on AI to drive next wave of cloud, revenues

While Microsoft reported a slowdown in cloud revenues in its second fiscal quarter, Microsoft CEO Satya Nadella expressed optimism about a recovery that will be driven by the heavy infusion of AI into core products, including Azure and Office.

Nadella addressed financial analysts at his quarterly meeting, adding that Microsoft 365 and Azure are is rapidly evolving into an “AI-first platform” that will make users more productive and provide more opportunities to be creative with both existing and new applications.

“The next big wave of computing is being born as we transition our AI models into new computing platforms,” ​​he said during the investor call Tuesday. “This is an important time for Microsoft to work with customers to extract more value from IT investments and build long-term loyalty with them, while aligning our cost structure with revenue growth.”

Despite the slowdown, Microsoft managed to post a small gain in total revenue for the second fiscal quarter.

Satya Nadella, CEO of Microsoft

The company reported a 2% increase in revenue, to $52.75 compared to $51.72 billion, while net profit fell to $16.43 billion compared to $17.4 billion in the same quarter last year. Microsoft’s cloud revenue was $27.1 billion, up 22% year-over-year, Microsoft CEO Satya Nadella said in remarks to financial analysts.

Azure growth slowed to 31%, barely beating the analyst consensus of 30.8%. The cloud platform grew 35% in the quarter ended December 31. Server products and cloud services grew 20%, largely driven by Azure and other cloud services, which were up 31%.

Explaining the slowdown in parts of the company’s cloud business, Nadella said organizations became cautious in the second half of 2022 given the challenges posed by the pandemic and inflationary pressures.

Just as we saw customers accelerate their digital spend during the pandemic, we now see them taking the time to optimize that spend. These organizations are also exercising caution given the macroeconomic uncertainty.

Satya NadellaMicrosoft, director

“Just as we saw customers accelerate their digital spend during the pandemic, we now see them taking the time to optimize that spend,” Nadella said. “Those organizations are also cautious, given the macroeconomic uncertainty.”

One analyst shared that optimism, saying companies will start spending more on cloud services later this year.

“The slowdown will be temporary. I think it’s a reflection of the market’s austerity right now,” said Dan Newman, principal analyst at Futurum Research and CEO of Broadsuite Media Group. “Their cloud performance for the quarter represents some pretty decent growth in a market that’s currently widely viewed as abysmal.”

AI to drive growth

Newman added that the company’s recent investment in ChatGPT will help as an accelerator for Microsoft’s cloud sales going forward.

“Users are looking for ways to get more out of the technology investments they’ve made,” said Newman. “The fundamental inclusion of AI in more offerings will add and deliver value [Microsoft] more pricing power.”

In support of its ambitions to create AI-first core platforms, Microsoft made perhaps the technology’s most audacious move yet earlier this week. Company invested another $10 billion in OpenAI, creators of ChatGPT. Microsoft plans to use the AI-based technology as a way to “democratize AI as a new technology platform”.

OpenAI has worked closely with Azure from Microsoft. Already in 2019, Microsoft made its first investment in the AI ​​startup, with an investment of $ 1 billion. As part of that deal, Microsoft became the exclusive provider of cloud computing services to OpenAI.

Microsoft plans to integrate ChatGPT into its product line in hopes of competing with a wide variety of rivals, including Amazon and Google in the cloud and a host of web-based application developers. The generative AI tool will also be integrated into Microsoft’s Bing search engine, where that would happen take on the virtually undisputed market leader Google.

Cloud momentum slows, hardware declines

What dampened that optimism were forward-looking statements about the near-term outlook for Azure cloud growth. Microsoft CFO Amy Hood said she expects cloud platform growth to slow another four to five percentage points from its 35% growth in the December 2022 quarter. This caused Microsoft’s share price to fall in late afternoon trading.

The company’s Windows OEM and hardware businesses continue their downward spiral. Windows OEM sales fell about 39% as demand for desktop and laptop PCs continues to decline.

Revenue from devices, such as the Surface tablets and desktops also dropped 39%.

In the midst of all this activity, Microsoft is putting its violation of the Federal Trade Commission (FTC) and the European Commission receive approval for the proposed $69 billion acquisition of video game giant Activision Blizzard. Hood told analysts she was confident they could close the deal in late 2023, pending FTC approval.

Microsoft reported a $1.2 billion lawsuit related to its decision to lay off 10,000 employees last week, in addition to the costs associated with overhauling the hardware setup.

As Editor At Large at TechTarget’s News Group, Ed Scannell is responsible for writing and reporting breaking news, news analysis and articles on technology issues and trends impacting business IT professionals.

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