AI revenue has yet to take off, and the growth rate of cloud business continues to slow down. Microsoft's fourth quarter was lukewarm, with a post-market drop of over 4%.

After the US stock market closed on Tuesday, July 25th, Microsoft announced its financial results for the fourth quarter and full fiscal year of 2023, ending on June 30th.

According to the earnings report, Microsoft's revenue in the fourth quarter increased by 8% year-on-year to $56.2 billion, surpassing market expectations of $55.49 billion, but the growth rate was lower than the 12% of the same period last year. Operating profit increased by 18% year-on-year to $24.3 billion, net profit increased by 20% year-on-year to $20.1 billion, and diluted earnings per share increased by 21% year-on-year to $2.69, exceeding market expectations of $2.56. Capital expenditure, which the market was concerned about, reached $8.94 billion in the fourth quarter, higher than the market expectation of $7.85 billion.

Looking at the full fiscal year, the company's revenue growth slowed to 7%, reaching $211.9 billion. In the past five fiscal years, Microsoft's revenue growth rate has exceeded 10%.

During the conference call after the earnings report, Microsoft management stated that Azure accounted for over 50% of the $110 billion cloud sales in fiscal year 2023.

Regarding the financial performance for the first quarter and full fiscal year of 2024, Microsoft management expects intelligent cloud revenue to be between $23.3 billion and $23.6 billion, personal computing business revenue to be between $12.5 billion and $12.9 billion, and productivity and business processes revenue to be between $18 billion and $18.3 billion. Operating expenses are expected to be between $1.66 billion and $1.68 billion, and Azure revenue growth rate for the first quarter of fiscal year 2024 is projected to be between 25% and 26%. This indicates that the growth rate of this "cash cow" business of Microsoft will further slow down.

Looking at the full fiscal year of 2024, the company expects the growth rate of revenue and costs to be higher than that of fiscal year 2023. Capital expenditure is expected to increase quarter by quarter in fiscal year 2024, with investments in data centers, CPU chips, GPU chips, and network devices. At the same time, operating expenses will maintain a "low-speed" growth. The exchange rate impact in fiscal year 2024 is expected to increase total revenue growth by approximately 1 percentage point.

After the release of Microsoft's earnings report on Tuesday, the stock price initially dropped by nearly 3% in after-hours trading, but the decline gradually narrowed. During the conference call, the decline was within 0.5%. However, due to the further slowdown in Azure's growth rate in the performance guidance, the decline quickly expanded, reaching over 4% at one point. In the three months leading up to June, Microsoft's stock price rose by 18%, surpassing the 8.3% increase of the S&P 500 index during the same period. Last week, driven by optimism about the newly launched artificial intelligence strategy and products, Microsoft's stock price reached a new all-time high.

Strong performance in overall Q4 results, but cloud business growth slows down

Amy Hood, Executive Vice President and Chief Financial Officer of Microsoft, stated:

Driven by Microsoft's cloud revenue of $30.3 billion this quarter, we have delivered an outstanding performance at the end of this fiscal year, with a YoY growth of 21%.

Microsoft's Q4 cloud revenue exceeded market expectations at $30.05 billion.

Breaking down the business segments, Microsoft's productivity and business revenue in Q4 grew by 10% YoY to $18.3 billion, surpassing the market expectation of $18.1 billion. Among them, driven by a 15% YoY growth in revenue from the Office 365 software series, revenue from commercial products and cloud services increased by 12% YoY; revenue from consumer products and cloud services increased by 3%; Microsoft 365 consumer subscriptions reached 67 million; revenue from the professional networking site LinkedIn increased by 5%; driven by a 26% YoY growth in revenue from Dynamics 365 software, revenue from Dynamics products and cloud services increased by 19%.

Microsoft's intelligent cloud business revenue grew by 15% YoY to $23.99 billion, surpassing the market expectation of $23.8 billion. Among them, driven by a 26% YoY growth in Azure and other cloud service businesses, revenue from server products and cloud services increased by 17%. It is worth mentioning that the YoY growth rate of Azure and other cloud service businesses, after excluding the impact of exchange rate fluctuations, slowed down to 27% compared to the growth rate of 31% in the previous quarter. Microsoft's cloud computing business has been its growth engine for many years, but due to concerns about the global economic health, this business has been significantly impacted, and many technology customers have been reducing their cloud computing expenses. During the prosperous period of the COVID-19 pandemic, Microsoft's Azure cloud services achieved a YoY growth rate of 50% or even higher.

Microsoft's more personal computing business revenue declined by 4% YoY to $13.9 billion, but performed better than the market expectation of $13.58 billion. Among them, revenue from Microsoft's operating systems decreased by 12% YoY; revenue from hardware devices decreased by 20% YoY; revenue from commercial products and cloud services increased by 2% YoY; revenue from Xbox content and services increased by 5% YoY; revenue from search and news advertising services increased by 8% YoY.

In Q4, Microsoft returned $9.7 billion to shareholders through stock repurchases and dividends.

In addition, in order to reduce expenses, Microsoft has recently laid off more than a thousand employees. The latest layoffs are not part of the previous plan to lay off 10,000 employees.

AI Technology Has Yet to Make an Impact in Earnings Report

Most of Microsoft's major product lines have integrated a range of new artificial intelligence programs based on partner OpenAI models, and there is a growing demand for this service in the market. However, the company's Office productivity suite, which includes AI components, is not widely used, and overall spending on Azure cloud services and Office applications is slowing down after years of increasing corporate investment. At the same time, PC shipments have declined for the sixth consecutive quarter, eroding sales of Microsoft software and devices.

As of the end of June, Azure OpenAI has 11,000 users, a significant increase compared to 4,500 at the end of May.

When it comes to AI technology, Microsoft Chairman and CEO Satya Nadella said:

Companies not only need to ask how, but also how quickly, they can responsibly and securely apply next-generation AI to address their biggest opportunities and challenges. We remain focused on leading the transformation of the AI platform, helping customers derive maximum value from their digital investments using Microsoft Cloud, and improving operational leverage.

Microsoft is increasing its spending to expand data centers and acquire chips for running complex AI systems. To offset the massive investment, Microsoft is introducing ways to monetize these products. Earlier this month, the company set a price of $30 per user per month for its Office AI tool, Microsoft 365 Copilot, while most enterprise customers have already paid for the productivity suite (including Word, Excel, email, and conferencing software). Many analysts consider Microsoft's pricing to be aggressive and expensive.

Many investors are skeptical about whether AI can improve the profitability of tech companies, believing that AI technology is more of a hype. However, Sanford C. Bernstein & Co. analyst Mark Moerdler said:

Customers who are enthusiastic about cloud computing say after trying Microsoft's AI components, "We'd better optimize the products we purchase." The market will not see a sudden surge in momentum from AI—it will be gradual.

Microsoft management also stated on the conference call that the driving force of AI's contribution to the company's performance growth is expected to be gradual.