What Microsoft’s earnings tell us about AI and cloud trends

Good morning.

As CEOs and CFOs decide on cloud and AI use cases and budgets in an uncertain economy, Microsoft’s latest quarterly earnings provide some insight, according to Dan Ives, managing director and senior equity analyst at Wedbush Securities.

The tech giant's results for its quarter ending Sept. 30, "will be front and center for tech investors across the Street as this will act as a major barometer for overall cloud and enterprise spending heading into year-end and 2024,” Ives wrote in a note to investors on Tuesday afternoon.

Microsoft’s total revenue of $56.52 billion for Q3, a 13% increase year over year (up 12% in constant currency) came in above Wall Street’s expectations of $54.52 billion. Operating income was $26.9 billion, up 25% (up 24% in constant currency), while EPS of $2.99 came in above a $2.65 estimate.

This is a “very strong performance given the macro headwinds as more enterprises move to the cloud while the company rapidly infuses AI across the entire tech stack,” according to Ives.

Microsoft Cloud revenue was $31.8 billion for the quarter, up 24% (up 23% in constant currency) year-over-year. Microsoft EVP and CFO Amy Hood attributed this growth to “consistent execution by our sales teams and partners,” she said on the earnings call.

“Higher-than-expected AI consumption contributed to revenue growth in Azure,” Hood said. "While the trends from prior quarters continued, growth was ahead of expectations, primarily driven by increased GPU [graphic processing units] capacity and better than expected GPU utilization of our AI services.”

Looking at Azure, Microsoft’s cloud computing platform, revenue grew 29% year over year, compared to Wall Street's expected 26%. Large language models like GPT-3 and GPT-4 are on Azure OpenAI Service. Microsoft has a multi-year, multi-billion-dollar investment with OpenAI, the startup behind ChatGPT.

A report by the International Data Corporation (IDC) released this month forecasts that enterprises will invest nearly $16 billion worldwide on generative solutions in 2023. The IDC predicts this spending, which includes generative AI software as well as related infrastructure hardware and IT/business services, will reach $143 billion in 2027. This will have a compound annual growth rate of 73.3% over the 2023-2027 forecast period, according to IDC.

Regarding customer spend on AI products, "an important piece as you think about stability and commercial demands" is making sure that "customers are getting a very quick return on value, real productivity improvement, and real savings," Hood said on the call.

Sheryl Estrada
sheryl.estrada@fortune.com

This story was originally featured on Fortune.com