What Microsoft’s earnings tell us about AI and cloud trends

As CEOs and CFOs decide on cloud and AI use cases and budgets in an uncertain economy, Microsoft’s latest quarterly earnings provide some insight, according to Dan Ives, managing director and senior equity analyst at Wedbush Securities.

The tech giant’s results for its quarter ending Sept. 30, “will be front and center for tech investors across the Street as this will act as a major barometer for overall cloud and enterprise spending heading into year-end and 2024,” Ives wrote in a note to investors on Tuesday afternoon.

Microsoft’s total revenue of $56.52 billion for Q3, a 13% increase year over year (up 12% in constant currency) came in above Wall Street’s expectations of $54.52 billion. Operating income was $26.9 billion, up 25% (up 24% in constant currency), while EPS of $2.99 came in above a $2.65 estimate. 

This is a “very strong performance given the macro headwinds as more enterprises move to the cloud while the company rapidly infuses AI across the entire tech stack,” according to Ives.

Microsoft Cloud revenue was $31.8 billion for the quarter, up 24% (up 23% in constant currency) year-over-year. Microsoft EVP and CFO Amy Hood attributed this growth to “consistent execution by our sales teams and partners,” she said on the earnings call.

“Higher-than-expected AI consumption contributed to revenue growth in Azure,” Hood said. “While the trends from prior quarters continued, growth was ahead of expectations, primarily driven by increased GPU [graphic processing units] capacity and better than expected GPU utilization of our AI services.” 

Looking at Azure, Microsoft’s cloud computing platform, revenue grew 29% year over year, compared to Wall Street’s expected 26%. Large language models like GPT-3 and GPT-4 are on Azure OpenAI Service. Microsoft has a multi-year, multi-billion-dollar investment with OpenAI, the startup behind ChatGPT. 

A report by the International Data Corporation (IDC) released this month forecasts that enterprises will invest nearly $16 billion worldwide on generative solutions in 2023. The IDC predicts this spending, which includes generative AI software as well as related infrastructure hardware and IT/business services, will reach $143 billion in 2027. This will have a compound annual growth rate of 73.3% over the 2023-2027 forecast period, according to IDC.

Regarding customer spend on AI products, “an important piece as you think about stability and commercial demands” is making sure that “customers are getting a very quick return on value, real productivity improvement, and real savings,” Hood said on the call.

Sheryl Estrada
sheryl.estrada@fortune.com

Leaderboard

Jeffrey L. Tate was named CFO at Dow Inc. (NYSE: DOW), effective Nov. 1. Tate will succeed Howard Ungerleider, who has elected to retire from the company to pursue new opportunities following 33 years of service. Ungerleider most recently served as president and CFO. He will officially retire in January 2024. Tate, 54, rejoins Dow following his service as EVP and CFO of Leggett & Platt from September 2019 through June 2023. He first joined Dow in 1992 and brings 27 years of prior Dow service in senior-level finance and operating and general management roles, including VP of finance for Dow Packaging & Specialty Plastics. In prior roles, he was chief audit executive and was also director of investor relations. 

Oliver Gloe was named CFO at Latham Group, Inc. (Nasdaq: SWIM), a designer and manufacturer of in-ground residential swimming pools, effective Nov. 13. Gloe will join Latham on Oct. 30 as VP of finance before assuming the role of CFO. Mark Borseth, who currently serves as interim CFO, will transition to the role of strategic advisor to the company from Nov. 13-Dec. 31. Gloe joins Latham after serving with Fortune Brands Innovations as the CFO of outdoors and security. Before that, he served as CFO of global operations at Stanley Black & Decker. He previously held various roles at the Goodyear Tire & Rubber Company, including VP of finance, Americas and VP of finance of Asia Pacific. Gloe also served as CFO of Europe and Mediterranean at General Cable.

Big deal

A data analysis of e-commerce transactions conducted by ACI Worldwide (Nasdaq: ACIW), a global provider of digital payments software, finds transactions are expected to rise 14% from October through December 2023 compared to the same period last year. 

Regarding e-commerce in the holiday season, Cyber Monday is predicted to have a 19% increase in transaction volume growth in 2023 compared to the same time in 2022. Transactions on the Sunday before Cyber Monday are predicted to increase by 9%, the Saturday after Black Friday by 6%, Black Friday by 5%, and Thanksgiving by 2%.

Gaming emerges as the leading sector in the predicted transaction volume growth at 180%, followed by telco at 12%, retail at 9%, and travel at 3%, according to ACI.

Going deeper

How the U.S. Could Stabilize Debt and Fuel Economic Growth, a new report in Wharton's business journal, discusses the Penn Wharton Budget Model that suggests three options for effectively lowering the debt-to-GDP ratio. Researchers warn that the U.S. government needs to act now.

Overheard

"There is no better time than now to introduce a four-day workweek. A shorter working week, in the form of a four-day workweek, is a transformative solution that can empower employees by providing them with the flexibility they need to juggle work and caregiving responsibilities effectively, closing the gender pay gap."

—Mansoor Soomro, Ph.D., the Enterprise and Innovation Lead at the Future of Work research unit at the Teesside University International Business School, writes in a Fortune opinion piece.