The Six Five team discusses Microsoft Earnings.
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Daniel Newman: Microsoft. Oh, so beat, beat soft guide and the market said no thanks. That’s the short synopsis of what happened. Company was up on earnings, it was up on revenue, had good op inc, up 18%, net inc up 20% companies crushing it, making money, but the guide was a little soft. There seems to be a bit of conservatism coming out of Redmond. Moreover, what really I think drove the number down was its Azure number continues to grow more slowly.
So, their fiscal year 2023, it was a lowest annual growth rate for the company, and then of course for Azure hitting, I think it was 26% in the quarter, seeing its growth number passed up by Google, and we’ll talk about that later and I think people are really selling. So, what’s going on here? Pat, here’s my thought process. AI is the talk track, but people still actually care about real numbers. And so, what’s happening right now is we have the talk track of AI, AI, AI, AI, Co-pilots, AI, Azure, AI devices, AI teams, and the good news is I think the companies got plans on the horizon. This last week, it did a sales service cloud announcement, and in this announcement it really was able to finally articulate a $30 per user for the Co-pilot in their Dynamics app. I think we’re starting to see the biggest customers now, are using the Office Co-pilot, which Pat, I don’t know about you, but I want some of that.
Patrick Moorhead: Oh, I want some of that now.
Daniel Newman: And then, if you start to think about that, across hundreds of millions of Microsoft users, that could become a really important number. The other thing I think that’s going on with AI, is that early lead, that open AI early lead that everyone had seen, it is somewhat dissipated really because one, LLMs are quickly becoming a bit commoditized, so business models are becoming more important than an LLM itself, and we saw that while the Bing numbers got some good early traction, people didn’t leave Google. And so, there was kind of a thought that maybe this would be an exodus from Google, and there wasn’t an exodus there, so what slowed it down? Those are the kind of the three things.
But, here’s my take Pat, kick it back to you. Microsoft has a really good moat by putting these copilot features on top of Dynamics, on top of Teams, on top of Office, on top of the Windows platform, and I think that’s going to add value long term. So, while people in the short term are maybe not seeing enough immediate revenue from AI to be happy, I think long term Microsoft’s just fine. I think a little conservatism and guidance, given there’s a little bit of exuberance around AI and the market isn’t the worst thing. They’re better off coming in light now, taking a little bit of a whacking in the market and beating next quarter, than overestimating and coming in short.
Patrick Moorhead: Yeah, those were good observations. If you remember, I don’t know if it was a couple years ago, maybe it was a hundred episodes ago, there was a lot of this talk about AWS number, and on a percentage basis, and I think Azure is right there. It’s this huge base, it has massive scale and is still growing. When you have a footprint like that, it’s almost impossible that you’re going to be able to crank out these incredible numbers. So, that’s one thing. I mean, 26% and 27% is still pretty crazy for Azure and other cloud services revenue, and yeah, that one point from AI services frosted some people, but again on this just gigantic base of cloud capabilities.
AI revenue probably take a while to show up, but like you said, really glad to see that they’re pricing it into services and putting a price out there, and people might be like, “Well, of course that’s the case.” There are very few people who have put prices against their AI services, quite frankly because they’re not GA, or they’re waiting to see what the competition is going to bring out. Now, we want to talk about percentages, the AI number is doubling for the next quarter, going from 1% to 2%. So, for people who like to look at growth like that, there you go.
Daniel Newman: Pat, you ever seen the thing where they said, “Would you rather have a penny a day and double it for a month?”
Patrick Moorhead: I have.
Daniel Newman: Pick a penny and double up for a month, they’re $10,000 right now and seeing what the difference… What I’m saying is that they keep doubling, that’ll end up being pretty good for them.
Patrick Moorhead: Totally. My final statement is that Amy Hood, the CFO said that AI will be their fastest business to $10 billion. So, again, I think it’s the company contending with its own degrees of success.