Don't worry, Microsoft said that AI revenue generation will gradually reflect

Original source: Mantou Finance

On July 26, Google (GOOG) released its second-quarter financial report, kicking off the financial report season for large US technology companies. Microsoft also released its fourth-quarter and full-year results for fiscal 2023 on the same day.

The report shows that Microsoft (MSFT)'s fourth-quarter revenue was US$56.2 billion, an increase of 8% year-on-year from US$51.9 billion in the same period last year, and a year-on-year increase of 10% excluding exchange rate changes; net profit was US$20.1 billion, an increase from last year This is an increase of 20% compared to the US$16.7 billion in the same period.

From the perspective of the disk, the market's response to the two companies is quite different. Due to Google's better-than-expected performance in the advertising business and cloud business, the company's after-hours trading once rose by nearly 7% after the company's financial report was released, but Microsoft's stock price fell sharply after the financial report was released. It is also a technology giant competing in generative AI. How did the quarter perform? Is Bing Chat inferior to Google Bard?

01 Modest revenue growth, cost controls boost profitability

The financial report shows that Microsoft's quarterly revenue has shown an overall growth trend. In the fourth quarter, it achieved revenue of US$56.2 billion, an increase of 8% year-on-year, which was higher than the market's expected US$55.5 billion. This was driven by growth in intelligent cloud, productivity and business processes, partially offset by declines in more personal computing, Microsoft said.

From the perspective of growth rate, Microsoft's quarterly growth rate dropped to a stage low in the second quarter and has rebounded for three consecutive quarters, but it is still at a low-digit growth rate, which is mainly dragged down by more businesses in the personal computer field.

In terms of net profit, in the fourth fiscal quarter, Microsoft achieved a net income of 20.1 billion yuan, a year-on-year increase of 20%. The growth rate of net profit is much higher than the growth rate of revenue, mainly due to the reduction of costs. The company said that due to strict cost management, the operating leverage has been improved, and the operating profit margin has been improved. The gross profit margin has also increased from 68% in the same period last year to 70%.

(Data source: company announcement)

02 AI revenue generation is not prominent, and the computer business continues to be a drag

Split Microsoft's revenue structure. Microsoft has three major business pillars, namely intelligent cloud (Azure cloud services and server software), productivity and business processes (mainly Office series products), more personal computing (based on Windows, Surface and Xbox) representative) business.

Since Microsoft's transformation in 2014, the intelligent cloud business has gradually become Microsoft's core business, and the proportion of cloud business revenue has continued to increase. In this fiscal quarter, these three major businesses accounted for 43%, 33%, and 25% of Microsoft's total revenue, respectively.

(Data source: company announcement)

Microsoft's cloud computing service—Azure has always been a strong competitor in the global cloud service market, ranking second in global share, second only to Amazon's (AMZN.US) AWS.

According to IDC’s calculation caliber, in the global cloud service market share in 2022, Amazon ranks first with a share of 40.5%, Microsoft ranks second with a share of 21.4%, followed by Google Cloud and Alibaba Cloud with a share of 6.1% respectively % and 5.2%.

The intelligent cloud business is highly related to artificial intelligence, but the help of AI in this fiscal quarter was not clearly reflected in the growth of the company's cloud business. In the fourth fiscal quarter, Microsoft's intelligent cloud achieved revenue of US$24 billion, a year-on-year increase of 15%. Although it was higher than the expected US$23.79 billion, the growth rate of the intelligent cloud business continued to slow down. Among them, the revenue of Azure and other cloud services grew by 27% year-on-year at a constant exchange rate, which is a very obvious slowdown compared with the growth rate of 31% in the previous quarter; while AI services only increased by 1%.

The wave of global intelligence is sweeping, making intelligent cloud an important social infrastructure, which can help enterprises achieve digital transformation and innovation faster. In order to promote the digital and intelligent transformation of enterprises, the cloud demand of enterprises is strong, and the prospect of cloud services is promising. Azure will continue to be the main growth driver for Microsoft in the future.

Microsoft Chief Financial Officer Amy Hood also admitted that the company's revenue growth will continue to be driven by Microsoft Cloud, but even if demand is strong, the growth of AI services will be gradual. It is predicted that the impact of AI on Microsoft's revenue will be concentrated in fiscal 2024 the second half of the year.

Productivity and business processes mainly include Office, Skype, LinkedIn, Dynamics business solutions (enterprise ERP, CRM). Among them, Office office software is the core product of Microsoft, which is divided into two parts: enterprise business and personal business.

In the fourth quarter, Microsoft’s productivity and business process business revenue increased by 10% year-on-year to $18.3 billion, of which Office 365 commercial revenue increased by 15%; but Office consumer product and cloud service revenue only increased by $54 million, an increase of 3% ; Among them, Microsoft 365 consumer users increased by 12% to 67 million.

The current position of Office in the enterprise has been very stable. The subscription business model will provide Microsoft with stable subscription revenue every year, and the growth rate may gradually slow down in the future. As for the personal business, Microsoft entered the market with Microsoft 365. Judging from the current number of users, its expansion is still in its infancy, but its growth potential cannot be ignored.

More Personal Computing Business is the only business with a negative year-on-year growth rate among the three major businesses of Microsoft. It recorded revenue of US$13.9 billion, a year-on-year decrease of 4%, including Windows, hardware devices (Surface tablet, PC accessories) , game business (Xbox game console and game software, etc.) and search and advertising business (bing). Due to the weakness in the PC market, Windows revenue fell by 5% year-on-year; hardware device revenue also decreased by 20% year-on-year.

In terms of search and advertising, Microsoft has launched a new artificial intelligence function, bing Chat Enterprise, whose user experience is similar to that of Bing Chat. In addition, according to Microsoft, Bing Chat Enterprise will protect the business data of the enterprise and will not be leaked outside the organization.

Bing is also the default search engine for OpenAI ChatGPT. Since Bing announced its access to ChatGPT, Bing users have used Bing Image Creator to conduct more than 1 billion chats and create more than 750 million images, and Microsoft Edge has taken share for the ninth consecutive quarter. In the fourth quarter, Microsoft's search and advertising revenue rose $86 million, or 3%, after growing 10% in the previous quarter.

Another business that Microsoft needs to pay attention to is the game business. In the fourth fiscal quarter, Microsoft's game revenue increased by $36 million year-on-year, an increase of 1%. Among them, Xbox content and service revenue increased by 5%; but Xbox hardware revenue fell by 13%. In addition, Microsoft originally planned to complete the acquisition of Activision Blizzard in fiscal year 2023, but the company stated in its financial report that the acquisition agreement for the acquisition of Activision Blizzard will be postponed to October.

03 Microsoft will continue to increase investment in AI

The market has given such high expectations to technology companies including Microsoft, and the most concerned thing is the progress of AI projects. But on the whole, Microsoft’s performance failed to highlight the contribution of AI for the time being, and the growth rate of the cloud business with a high correlation with AI continued to decline; the weakness of the PC market caused the company’s equipment revenue to continue to decline; although the bing search engine has access to the latest ChatGPT-4, but the revenue growth rate has slowed down compared with the previous quarter. Microsoft's performance in the fourth fiscal quarter was not so impressive and did not meet investors' expectations.

But Microsoft's investment in AI is very generous, and Microsoft's capital expenditures have increased more than expected. According to the financial report, Microsoft’s capital expenditure in the fourth fiscal quarter was as high as US$8.9 billion, an increase of 32% over the same period last year, which was mainly used to support cloud demand, including investment in artificial intelligence infrastructure.

Regarding the surge in capital expenditures, Microsoft stated in the financial report meeting that it has seen strong demand for AI. In order to support the growth of Microsoft Cloud and the demand for artificial intelligence platforms, it will continue to accelerate investment in cloud infrastructure in the future, and believes that these investments are growth. Opportunity, capital spending is expected to increase sequentially in each quarter throughout the year.

Looking ahead, Microsoft management expects revenue in the first quarter of fiscal 2024 to be in the range of $53.8 billion to $54.8 billion. Among them, Azure revenue growth rate will be 25% to 26%. Productivity and business process revenue will grow 9% to 11%, or $18.0 billion to $18.3 billion.

For More Personal Computing, revenue is expected to be $12.5 billion to $12.9 billion. Growth in the cloud and productivity sectors slowed further, and the PC business continued to decline.