Microsoft Earnings: Azure, Other Cloud Services Contribute 31% Growth
The software giant only grew 2% overall, though. Cloud computing represents the biggest bright spot.
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The software giant’s Intelligent Cloud Division on Jan. 24 showed 18% revenue growth (24% when adjusting for constant currency, which excludes the effect of foreign currency rate fluctuations). The total dollar figure hit $21.5 billion. Meanwhile, for Microsoft overall, revenue amounted to $52.7 billion — a 2% gain and a narrow miss of analyst estimates of $52.7 billion. Profit fell 12% to $16.4 billion. All in all, Microsoft’s growth marked the slowest in six years.
Note that Microsoft does not specifically break out Azure revenue. This makes it hard to understand whether Azure has edged closer to overtaking its biggest rival, Amazon Web Services. To that point, AWS’ third-quarter 2022 revenue hit $20.5 billion (Amazon will report its fourth-quarter 2022 earnings on Feb. 2).
Again, though, Microsoft’s Intelligent Cloud comprises at least four groups, so it’s difficult to know Azure’s exact contributions. However, Microsoft did say that revenue from Azure, and other divisions, resulted in 31% growth. Analysts were looking for increases of 35%. Amy Hood, Microsoft’s chief financial officer, told analysts on the company’s Jan. 24 earnings call that Azure’s growth was lower than executives were hoping.
And yet, more than 30% growth in a single quarter represents a significant number (what other technology shows this level of continual adoption?) — and reflects precisely what one industry expert told us in December.
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“The public cloud computing sector will continue to grow over 20% in 2023 (and IaaS and PaaS in particular will grow over 30%) as companies realize they lack the in-house resources to support infrastructure, rapidly evaluate a variety of low-level computing services, and deal with security and governance concerns,” Hyoun Park, CEO and Chief Analyst at Amalgam Insights said at the end of 2022. “This means that fully managed service offerings will become more attractive as customers seek functionality and value while dealing with the uncertainties of layoffs, office closings and moves, mergers and acquisitions, and the need to demonstrate a rapid payback period for any new service.”
Gordon McKenna, CTO of public cloud at managed cloud service provider Ensono, agreed.
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Ensono’s McKenna has a bold prediction that the channel will welcome: “Across 2023, the fundamental trajectory of the public cloud remains strong,” McKenna said on Jan. 24.
And the channel will continue to benefit.
“I would expect to see [Microsoft] double down on investment in Azure in 2023, boosted by its recent investment in OpenAI. With end-user budgets under scrutiny and pressure like never before, expect to see sweeping efforts from Microsoft to demonstrate their value to customers, expand investment in new products and services, build their partner ecosystem, and ensure the public cloud continues to deliver reliable business outcomes for customers.”
In terms of Microsoft’s partner ecosystem, the company recently made its ISV Success Program available for public preview, launched its Cloud Partner Program and relaxed licensing terms for certain hosting and outsourcing providers.
Meanwhile, Microsoft saw a decline in its PC and devices businesses, as analysts had expected. COVID-19-fueled demand continues to wane and observers have predicted subsequent buying slowdowns in areas such as personal computers. To that point, Microsoft’s PC sales dropped 19% in its fiscal second quarter. That tracks with the sector as a whole, according to research firm IDC.
“It is clear the pandemic boom is over for the PC market,” analysts said earlier this month.
But is all lost for channel partners? Click ahead.
All is not lost for channel partners who sell PCs. There’s room for more PC adoption.
Here’s how Ryan Reith, group vice president with IDC’s Worldwide Mobility and Consumer Device Trackers, put it:
“Consecutive quarters of declines clearly paint a gloomy picture of the PC market, but this is really all about perception. 2021 was near historic levels for PC shipments, so any comparison is going to be distorted. There’s no question when we look back at this time that the rise and fall of the PC market will be one for the record books, but plenty of opportunity still lies ahead. We firmly believe the market has the potential to recover in 2024 and we also see pockets of opportunity throughout the remainder of 2023.”
Up next, a check of other Microsoft business, including devices.
Turning to the devices business, Microsoft suffered steeper losses there than in PCs. The devices group, which includes the Surface tablet, the HoloLens and PC accessories, saw revenue decline 39%.
That drop came even though Microsoft debuted a range of new Surface products before the holidays.
“Execution challenges impacted our Surface business,” said Microsoft’s Hood.
The drop arrived, too after Congress refused the Army’s $400 million request to buy 6,900 headsets with HoloLens technology. Finally, Xbox hardware purchases went down, too, acting as another contributor in Microsoft’s decision to make “changes to our hardware portfolio” as it cuts jobs.
And, rounding out Microsoft earnings, the Productivity and Business Processes segment delivered $17 billion in revenue, up 7%. This unit houses Microsoft 365 (former Office 365), LinkedIn, Dynamics and productivity software.
Microsoft’s new numbers arrive as the company faces significant activity.
First, it has started laying off 10,000 employees. Cloud providers notoriously overhired during COVID-19 peak demand and now staff are paying the price. Microsoft took an $800 million charge in its fiscal second quarter for those job cuts. It had warned of a $1.2 billion charge.
At the same time, the software giant also continues to try to close on its $68.7 billion acquisition of video game maker Activision — the largest M&A transaction of 2022. However, the U.S. Federal Trade Commission has filed a lawsuit to halt the deal.
Furthermore, as Ensono’s McKenna noted, Microsoft is funneling $10 billion into OpenAI, the company that created the much-discussed artificial intelligence tool, ChatGPT. Microsoft already was investing in OpenAI, but the new infusion stands out as the most sizable.
On the next slide, we discuss even further the importance of OpenAI to Microsoft — and rival Google.
AI is going to change the world — at least according to Satya Nadella.
“The next major wave of computing is being born, as the Microsoft Cloud turns the world’s most advanced AI models into a new computing platform,” Nadella, chairman and chief executive officer of Microsoft, said in a Jan. 24 Microsoft earnings press release. “We are committed to helping our customers use our platforms and tools to do more with less today and innovate for the future in the new era of AI.”
Indeed, that strategy has Microsoft rival Google on edge, according to multiple reports. Even as Google enacts 12,000 layoffs, executives plan to invest more money into AI. Last month, Google issued a so-called “Code Red” amid fears of ChatGPT’s ability to hurt search engine ad revenue.
The new round of Microsoft earnings comes as Synergy Research Group reports that public cloud service and infrastructure revenue surpassed $500 billion in 2022. Gartner last year forecast overall outlay of $495 billion. On Jan. 23, Synergy calculated the final number at $544 billion, a 21% increase over 2021.
Most of the additional adoption came from infrastructure and platform as a service, Synergy analysts said. Those particular domains grew by 29%, reaching more than $195 billion, the firm said.
Those gains came despite macroeconomic pressures including inflation, a stronger U.S. dollar and problems in the Chinese market, Synergy noted.
On the next slide, find out what’s happening with managed private cloud, an area where many channel partners specialize.
It’s not just public cloud growing — managed private cloud services, too, recorded notable traction, alongside enterprise software as a service and content delivery networks, Synergy said.
Those three service segments added another $229 billion in revenue in 2022, for total average growth of 19% compared to 2021. Public cloud providers spent a collective $120 billion to build, lease and equip data centers to accommodate the deployments, Synergy said. That marked a 13% jump over 2021.
In terms of who led the public cloud race in 2022, Microsoft Azure, Amazon Web Services, Salesforce and Google Cloud all clamored for top billing, per Synergy.
See where Microsoft Azure ranked in important areas including services and data centers. Click to the next slide.
Notably, amid the latest Microsoft earnings announcement, Synergy Research ranks Azure second for infrastructure and platform services, third for managed private cloud and first for enterprise software-as-a-service.
Furthermore, Microsoft takes second place for 2022 spending on data center hardware and software, and number of data centers, and sits in third place for data center capacity.
Notably, amid the latest Microsoft earnings announcement, Synergy Research ranks Azure second for infrastructure and platform services, third for managed private cloud and first for enterprise software-as-a-service.
Furthermore, Microsoft takes second place for 2022 spending on data center hardware and software, and number of data centers, and sits in third place for data center capacity.
Organizations may be slowing their cloud spending but they’re still pouring billions into Azure, as Microsoft earnings today attest.
The software giant on Jan. 24 released its third-quarter fiscal year 2023 financials for the three months that ended on Dec. 31. The development came as Microsoft cuts 10,000 jobs.
Microsoft’s Amy Hood
“We feel confident in that exit rate,” chief financial officer Amy Hood told analysts on Tuesday’s Microsoft earnings call. She added, in response to a question, that the coming quarter will “see very moderated headcount growth on a year-over-year basis.”
That next round of Microsoft earnings is not yet scheduled. It will take place sometime in the regular second quarter.
In the slideshow above, Channel Futures breaks down the latest Microsoft earnings, tracking the software giant’s gains in cloud and whether it might have surpassed Amazon Web Services in market share.
We also look at results coming from other important business units including PCs and devices. And we discuss Microsoft’s new investment in OpenAI’s ChatGPT and what it means for Azure rival Google Cloud. Finally, we assess the entire public cloud landscape and projections for growth.
Click the slideshow above.
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