Microsoft Is Determined To Win The AI Wars As It Threatens Google's Online Search Dominance

On April 25th, Microsoft Corporation MSFT topped both top and bottom-line expectations with its fiscal third quarter results, showing no concerns like Amazon.com AMZN over cloud growth slowdown and giving Alphabet Inc GOOGGOOGL or more precisely, Google, a reason to fear for its leadership in the online search field. 

Layoffs

Joining its parent Microsoft, as well as Amazon and Alphabet, social media network for professionals LinkedIn revealed today it will be cutting 716 jobs out of its 20,000 workforce as well as pulling the plug on its China-targeted job application due to lack of demand. 

Fiscal Third Quarter Highlights

For the fiscal third quarter, Microsoft generated $52.86 billion in revenue that increased 7% YoY, topping Refnitiv’s consensus estimate of $51.02 billion. Net income increased 9% YoY to $18.3 billion, or $2.45 per share, topping Refinitiv’s earnings estimate of $2.23 per share.

Segments

Microsoft’s Intelligent Cloud business remains its most prolific segment that rose 16% and generated $22.08 billion in revenue, topping the StreetAccount consensus estimate of $21.94 billion. Growth from Azure and other cloud services slowed to 27% from 31% in the prior quarter, joining Amazon who also reported a cloud growth slowdown in April. Microsoft’s cloud performance was better than expectations of analysts CNBC pooled who expected on average 26.5% growth, while those gathered by StreetAccount were expecting 27.2%. But even Amazon warned that cloud will slow down further as troubled customers lower their spending in worsening macroeconomic conditions. 

The Productivity and Business Process segment that houses LinkedIn and Office generated revenue of $17.52 billion as it rose approximately 11% and above the StreetAccount consensus of $17.05 billion. Moreover, growth in revenue per user fueled a rise of 14% in revenue from commercial Office 365 subscriptions.

The Teams communication app expanded its userbase from its previously reported quarter as it went from 280 million to 300 million monthly active users.

The More Personal Computing segment, featuring Bing, Windows, Surface and Xbox experienced a revenue drop of 9% as sales amounted to $13.26 billion, but still topped $12.25 billion consensus expectation from StreetAccount. Over 100 million daily users are active on Bing while  gaming subscriptions resulted in revenue of almost $1 billion. 

In line with the PC market slump, sales of Windows operating-system licenses to computer makers dropped about 28%. 

Fiscal Fourth Quarter Guidance

CFO Amy Hood guided for revenue in the range between $54.85 billion to $55.85 billion in revenue, with the mid of the range translating to 6.7% growth but certainly exceeding Refinitiv’s consensus estimate of $54.84 billion. Hood did not hide excitement about the early feedback from AI developments and positive demand signals the tech giant received.

ChatGPT Integration With Bing And Edge Marked The Beginning Of AI Wars For The Search Engine Throne

By applying its technology to its search engine and web browser, Microsoft officially opened the AI race as it firmly believes it has a good lead and a differentiated offering. CEO Satya Nadella remarked that the tech giant is looking for ways to reshape the largest software category on the planet, which puts Microsoft face to face to Google owned by Alphabet Inc. If Microsoft plays its cards well, Wedbush tech analysts Dan Ives and John Katsingris believe the new AI integrations could results in major shifts from Google to Bing, which currently holds only 9% of the search market. 

During the latest reported quarter, Microsoft announced a new multibillion-dollar investment in OpenAI under which it will draw on the company’s artificial intelligence models to create a new version of its Bing search engine and enhance its Microsoft 365 productivity software. Interestingly, Sensor Tower data cited by Bank of America revealed that traffic for Bing spiked 16% in the six weeks upon Microsoft’s announcement ChatGPT will be incorporated into search, signaling a power shift dynamic on the online search field. 

Google’s Annual Conference

On Wednesday, Alphabet will be unveiling its new general-use large language model called PaLM 2, as well as advancements to Bard and Search with “generative experiences. Undoubtedly, AI will be the central theme of this year’s conference as Alphabet and Google promise to show how will AI help people reach their full potential. More importantly, Alphabet and Google need to show that they are not living on ‘borrowed time’ in the upcoming AI era that promises to redefine the search field that Google has been dominating for two decades. 

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.