Microsoft Q4 Earnings Report: Although there was a temporary setback, the way to break through is about to emerge. | [Hard AI]

Recently, it has been the earnings season for the US stock market. As the main driving force behind the current wave of AI development, the earnings reports of the two AI giants, Microsoft and Alphabet-C, have become the focal point of the market even before their release.

However, the reaction on Wall Street after the performance announcements of these two giants was like "a tale of two cities" - Alphabet-C's stock price soared by about 6% in after-hours trading, while Microsoft's stock price fell by 3.76%.

The main reason for this discrepancy is the difference between the earnings reports and market expectations:

● Microsoft's earnings report was considered "mediocre", with little contribution from AI to its revenue and weak growth in PC and cloud businesses, falling below market expectations.● On the other hand, Alphabet-C's various businesses showed "across-the-board growth", with improving profitability in its cloud computing business, surpassing market expectations.

So, did Microsoft's performance this quarter really turn out to be as pessimistic as the market expected?

Next, let's take a look at Microsoft's overall financial situation this quarter, the development of its various departments, and the outlook for the next quarter. We will analyze Microsoft's earnings report for this quarter and its recent actions.

Key points of this article:

● Performance overview: The performance this quarter was flat, with slowing growth and lower-than-expected guidance for the next quarter.● Investing in the future: Increasing product pricing while intensifying investment in AI.● Breaking new ground: Collaborating with Meta to promote Bing Chat.

Slowing business growth, AI impact yet to be seen, guidance lower than expected

At first glance, Microsoft's fourth-quarter revenues met market expectations. However, both the revenue growth rate and gross margin were below the comparable growth rate, and the performance guidance was lower than market expectations.

Meanwhile, in this quarter, the revenue growth rate of Microsoft's cloud services business slowed down, and the impact of AI has not yet been evident. Moreover, capital expenditure on AI services is still accelerating, causing concerns among some investors.

Specific analysis is as follows:

1. Cloud services: Operating revenue of $24 billion (market expectation: $23.8 billion), a year-on-year growth of 15%. Among them, Azure and other cloud services revenue increased by 26% year-on-year. Microsoft expects Azure's revenue growth rate for the next quarter to be between 25% and 26%, which is lower than market expectations.

2. Productivity and business processes (including Office productivity software, LinkedIn, and Dynamics): Operating revenue of $18.3 billion (market expectation: $18.1 billion), a year-on-year growth of 10%.The company recently launched the paid version of Microsoft 365 Copilot, but CFO Hu De stated, "Copilot is not ready for full release yet, and this product may not generate revenue until the second half of the 24th fiscal year."

3. Personal Computing Business: Revenue of $13.9 billion (market expectation: $13.6 billion), a YoY decrease of -4%. Among them, revenue from search and news advertising services increased by 8% YoY.

At first glance, the business growth rate seems good, but upon closer comparison, the growth rates of various businesses are all lower than the comparable growth rate (CC Growth). In other words, the Q4 quarterly revenue is actually weak.

Let's take a look at the business situation that the market is most concerned about:

● Sales revenue of Office commercial products and cloud services is considerable and still maintains a growth momentum.

● Sales of personal computer business continue to be sluggish, and the revenue for the next quarter is expected to be even lower.

● Revenue from the Office 365 software series increased by 15% YoY, with Microsoft 365 consumer subscriptions reaching 67 million; revenue from Dynamics 365 software increased by 26% YoY.

● Revenue from Azure and other cloud services increased by 26% YoY.

As for the previous period (first half of the 23rd year), the MoM growth rates of OpenAI's global traffic were 131.6%, 62.5%, 55.8%, 12.6%, 2.8%, and -9.7%. Will it continue?

In terms of this quarter's financial report data, the growth rate of Azure and other cloud service revenues has already slowed down compared to the previous quarter's 31% growth rate.

Even in the conference call, the company still stated that the demand for cloud business remains very strong.

However, in the performance guidance for the next fiscal year and Q1, Azure's estimated growth rate is only maintained at 25%-26%, almost consistent with the 23Q4 growth rate.

In other words, the demand for Azure cloud has entered a relatively stable growth range, and the explosive dividend that was previously present is almost gone.

Taking a closer look at Microsoft's three major performance guidance for 24Q1, the growth rates are basically the same as or slower than this quarter, falling short of market expectations:

1. Cloud Services: Revenue of $23.3-23.6 billion, a YoY growth of 15-16%.

2. Productivity and Business Processes: Revenue of $18-18.3 billion, a YoY growth of 9%-11%.

3. Personal Computing Business: Revenue of $12.5-12.9 billion, a YoY decrease of 7-10%.

Obviously, such performance guidance will greatly affect the valuation expectations that the capital market has for the company.

Investing in the Future: Increasing AI Investment and Product Pricing

Taking a long-term perspective on technological development, Microsoft has chosen to invest in AI construction with a very firm stance.

Microsoft expects that in order to meet the demand for artificial intelligence, capital expenditure will continue to increase every quarter throughout the fiscal year.

This money will be used for the construction of cloud and artificial intelligence infrastructure. The market for generative AI is still very broad, with customers in various industries, whether it's banks, retailers, or software companies. What Microsoft wants to do is provide customers with a platform for quickly building generative AI applications.

However, Microsoft also stated in the conference call that the gross margin of the products will change over time, and the good news is that this gross margin expansion will be faster than the previous cloud transformation.

In addition to increasing capital expenditure to pave the way for Azure's development, the pricing of products such as Office is also a guarantee for the company's future performance growth. Last week, Microsoft announced the pricing for the Microsoft 365 Copilot service:

$30 per user per month (for Microsoft 365 E3, E5, Business Standard, and Business Premium customers).

Compared to the original pricing of Office products ($398 per year),

Not only that: It is estimated that the price of Dynamics365 Copilot will be announced in the second half of the year, and the price is likely to be higher than $50 per month, approaching Salesforce's pricing.

Obviously, this move is intended to increase the pricing and improve the gross margin. However, according to senior strategic experts' estimates, the discounts that customers ultimately receive may vary greatly, making it difficult to determine the average price and the final impact on the gross margin.

As Microsoft CFO Hood said:

Copilot is not ready for full release yet, and the product may not generate revenue until the second half of fiscal year 2024.

Breaking the Deadlock: Partnering with Meta to Promote Bing Chat

After the popularity of OpenAI, the "two-way collaboration" between Microsoft and OpenAI has been regarded as a "cooperation model" by the industry.

However, with the emergence of various AI conversation competitors such as Bard, Claude, Character.ai, the early monopoly advantage of GPT seems to be slowly fading away. And Microsoft has also chosen to "keep up with the times" and no longer rely solely on OpenAI:

Recently, Microsoft announced its support for the Llama 2 large language model (LLM) series on Azure and Windows, which is a large language model developed jointly by Microsoft and Meta.

Azure customers can now easily fine-tune and deploy Llama 2 models with 7B, 13B, and 70B parameters on Azure, making it more convenient and secure.

In addition, Llama will be optimized for native running on Windows.

What does this mean?

We believe that this is an important step for Azure to increase its appeal. Relying solely on OpenAI's business has been insufficient to drive Azure's usage.

Azure has been lagging behind in its development for many years. With the decline in traffic from GPT, if Microsoft does not make changes, it will be difficult for Azure's revenue to reach a higher level.

Furthermore, partnering with Meta, which is gaining momentum in the open-source field, will directly become the gateway for Azure's traffic. It must be said that this is a clever move, but when it will actually generate revenue is still uncertain.

On the other hand, Microsoft is also paving the way for its own AI conversation products.

Microsoft announced that the Bing Chat chatbot will be launched on third-party browsers, including Alphabet-C's Chrome and Apple's Safari. Microsoft is trying to make this tool available to users of both browsers. This is a blatant promotion of their own product from their competitors, a clever move indeed.

Microsoft's Communications Director, Caitlin Roulston, also stated, "We are excited to expand to more users."

Senior strategic experts also expressed that Microsoft's collaboration with Meta is not only to complement the development of the consumer ecosystem but also to put pressure on OpenAI. From this, we can also see some interesting trends:

● Currently, it is still difficult for large models to generate profits, and the market influence may further decline in the future.

● AI is just a technology, not a product. The ability to complete the business loop is the real key to success.

Author: Han Feng, Source: Hard AI, Original Title: Microsoft Q4 Earnings Report: Although There Was a Temporary SetbackBut the way to break the deadlock is "about to emerge" | [Hard AI]