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5 key takeaways from Microsoft’s earnings

CapEx, a cloud slowdown, and more...

Microsoft shares slumped after the company reported revenue growth of 2% in the second quarter – its lowest in six years – with Azure growth also slowing to the “mid-30s” as companies hit the brakes on cloud spending.

Here are 5 key takeaways from Microsoft’s Q2 2023 earnings call on January 24: From cybersecurity spending and consolidation to soaring Teams use, ChatGPT adoption to a surge in operational expenditure (opex)

1:) Some hard numbers:

Microsoft 365 now has 63 million consumer subscribers, up 12%. Teams surpassed 280 million monthly active users during the quarter. LinkedIn has 900 million members, with three new ones signing up every second (and LinkedIn revenues climbing 10%). Game Pass users passed 120 million. Revenue for the quarter was $52.7 billion. Capital Expenditure was $6.8 billion "to support cloud demand"). Shareholders meanwhile got $9.7 billion back through share repurchases and dividends. Net income was $16.4 billion; down 12%. Windows OEM revenue meanwhile is set to fall more than 30% "in line with the PC market and devices revenue to plummet "mid-40s".

2: (Open)AI is transforming Azure, coming to everything

Microsoft made its Azure OpenAI service more broadly available less than 10 days ago.

It already has “over 200 customers from KPMG to Al Jazeera using it” said CEO Satya Nadella, adding that “we will soon add support for ChatGPT, enabling customers to use it in their own applications for the first time.”

He added: “All of this innovation is driving growth across our Azure AI services.

“Azure ML[machine learning] revenue alone has increased more than 100% for five quarters in a row with companies like AXA, FedEx and H&R Block choosing the service to deploy, manage and govern their models.”

“Under the radar, if you will, for the last 3.5 years, four years, we have been working very, very hard to build the training supercomputers [for OpenAI and other Artificial Intelligence workloads]– the core [of] Azure itself is being transformed for the core infrastructure business [as inference demands rise on the infrastructure from customers]. We fully expect us to sort of incorporate AI in every layer of the stack,” the Microsoft CEO added.

(It’s an approach NVIDIA CEO Jensen Huang painted a picture of –“modern AI factories with data as the raw material input and intelligence as the output” – in 2022, saying “in the future, you’re going to see large language models essentially becoming a platform themselves running 24/7, hosting a whole bunch of apps.”)

3: Cloud spend slowing

Every hyperscaler has, unsurprisingly, warned in recent months that customers are "exercising caution"; racking up huge cloud bills by mistake is a little 2018 at this point for most, but even more sophisticated cloud users are being exceptionally mindful of cost control and Azure exited the quarter growing at a "mid-30s" rate.

CFO Amy Hood told analysts: "it’s actually quite hard to separate from a driver perspective how much is optimization versus macro. It’s all related when you start to say 'what’s the best ROI I can get on every budget dollar I spend?' and our job as a partner to so many of these customers is to help them do that."

Is the slowdown -- in cloud and elsewhere likely to result in more job cuts?

Hood suggested not: "We take decisions like the one we had to make to get our cost structure more in line with revenue just incredibly seriously because we have lots of very talented people who were impacted by that. And so I do think that we feel confident in that exit rate."

4: Cybersecurity vendors, look out...

Microsoft's cybersecurity revenue has surpassed $20 billion over the past year.

Debate continues to rage amongst analysts and security firms themselves over the extent to which Microsoft will cannibalise their revenue in this space -- many say costs are deceptively high -- but Microsoft was bullish: "We are the only company with integrated end-to-end tools spanning identity, security, compliance, device management and privacy informed and trained on over 65 trillion signals each day. We are taking share across all major categories we serve. Customers are consolidating on our security stack in order to reduce risk, complexity and cost. The number of organizations with four or more workloads increased over 40% year-over-year. UK retailer Fraser Group, for example, consolidated from 10 security vendors to just Microsoft" Nadella boasted.

(In December SentinelOne's CEO Tomer Weingarten was asked by analysts how much of a threat he felt Microsoft was. For what it is worth, his response was that "Microsoft's offering, as it pertains to the software piece, might be included and perceived as free if you look at integration costs, management costs, and MDR services or any affiliated service, that actually bumps up the price in a pretty significant manner... we've seen more and more Microsoft displacements customers rebounding from Microsoft's offering. Some citing it as eventually -- in eventual cost terms, the most expensive solution they had to manage over the years. So, we feel the competitive environment versus Microsoft is relatively sustained [unchanging]. We haven't seen -- any major shift.)

5: OpEx has soared...

Microsoft's OpEx surged 37% in constant currency.

That included "roughly 13 points of impact from the Q2 charge noted earlier [from layoffs and planned hardware portfolio changes; little detail yet on that] and roughly 7 points of impact from the Nuance acquisition. (Microsoft completed its acquisition of Nuance -- a conversational AI specialist working across industries including healthcare, financial services, retail and telecommunications -- for $19.7 billion in March 2022.)