Microsoft Shifts To AI As Product Revenue Falls In Q2 2023

Microsoft (Nasdaq: MSFT) is underscoring the tech titan’s shift to artificial intelligence following the results of its second quarter of fiscal 2023.

“The age of AI is upon us and Microsoft is powering it,” CEO Satya Nadella said in the earnings call.

The tech firm reported its slowest sales growth in more than six years in the last quarter, as demand for its software and cloud services slowed due to concerns about the global economy’s health. Its revenue increased 2% year on year to $52.7 billion while net income decreased by 12% to $16.4 billion. This is the company’s lowest revenue growth since the June 2016 quarter.

Product revenue contributed $16.5 billion to topline revenue, down from last year’s $20.8 billion. Meanwhile, service and other revenue rose to $36.2 billion from $30.9 billion in the year-ago period.

Microsoft also reported that revenue from Intelligent Cloud increased by 18% year on year to $21.5 billion, while revenue from Productivity and Business Processes, which includes Office commercial and consumer products and cloud services, increased by 7% year on year to $17 billion.

Personal computing revenue, which includes Windows, Xbox, and other products and services, fell 19% year on year to $14.2 billion.

According to Nadella, the company’s emphasis on AI is driven in large part by a “changing environment” caused by customers looking to optimize their own technology spending “given the economic uncertainty.”

“We are going to lead in the AI era, knowing that maximum enterprise value gets created during platform shifts. With that as the backdrop, the Microsoft Cloud exceeded $27 billion in quarterly revenue, up 22% and 29% in constant currency,” Nadella noted.

The remarks come a day after the tech giant’s announcement of a significant multi-year investment in OpenAI, a startup company known for developing the viral ChatGPT chatbot. The investment shows the dedication to incorporating artificial intelligence software into its product suite, which ranges from design app Microsoft Design to search app Bing, as well as funding the computing power that OpenAI requires to run its various products on Microsoft’s Azure cloud platform.

OpenAI’s ChatGPT has been gaining ground in the artificial intelligence space, having beat the Turing test and passing technical knowledge exams like a Wharton’s MBA test and the US Medical Licensure Exam.

READ: OpenAI’s ChatGPT Passes Medical Licensure, Wharton MBA Exams

“We fundamentally believe the next platform wave will be AI,” Nadella said. “[With AI] the core of cloud computing fundamentally changes. We fully expect us to incorporate AI into every part of the [Microsoft technology] stack.”

Gloomy Q3 2023

CFO Amy Hood meanwhile provided an update on how the company expects business to progress in the fiscal third quarter. Without providing specific earnings-per-share or revenue forecasts, Hood stated that Microsoft expects foreign currency exchange rates to cause a “three-point decrease in revenue.”

“Based on current rates, we now expect FX to decrease total revenue growth by approximately 3 points, COGS growth by 1 point and operating expense growth by 2 points,” Hood said.

Microsoft’s Intelligent Cloud business, which includes Azure cloud computing, increased 18% year on year to $21.51 billion. Azure grew 31%, slightly exceeding some analysts’ expectations. Hood warned that growth in the Azure business slowed at the end of the year and would slow further in the coming months.

“We are seeing customers exercise caution in this environment and we saw results weaken through December,” Hood said.

According to Hood, the December slowdown should continue into Q3 results for Windows commercial products and cloud services, which includes Windows volume licenses for businesses. Her forecast called for flat revenue for Windows commercial products and cloud services, compared to a 3% drop in the fiscal second quarter.

Microsoft also reported a 12% drop in videogame revenue during the quarter. The videogame industry is slowing as pandemic-related restrictions relax and people spend less time at home.

“In gaming, on a prior year comparable that benefited from increased console supply, we expect revenue to decline in the high single digits. We expect Xbox content and services revenue to decline in the low single digits as growth in Xbox Game Pass subscriptions will be more than offset by lower monetization per hour and third-party and first-party content,” Hood explained.

Currently, the tech firm’s planned $68.7 billion acquisition of Activision Blizzard (Nasdaq: ATVI) is facing legal hurdles, mainly with the Federal Trade Commission for anti-competition concerns.

The company’s shares, which had initially risen in after-hours trading as a result of the results, gave up their gains after the company announced its guidance last night.

Microsoft last traded $234.52 on the Nasdaq.

Information for this briefing was found via Wall Street Journal, CNBC, Seeking Alpha, and the sources mentioned. The author has no affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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