Microsoft and Google hand in homework at the same time, Google's Jedi counterattack "wins"

Author: Juny

Image source: Generated by Unbounded AI

The most interesting and most watched earnings day of the quarter is here.

The strong duel between Google and Microsoft in the AI business is still going on, and this time, the quarterly financial reports of the two giants are even released on the same day.

In the past quarter, the "battle" between Google and Microsoft can be said to be very anxious. Google IO, Microsoft Build and other annual conferences have appeared one after another, and the two companies are overwhelmed with AI model updates and product releases. But what everyone is curious about is whether AI has really brought them users and benefits, and which of the two companies has performed better?

Below, let's find out in their latest quarterly earnings report.

Not afraid of Microsoft’s challenge, Google’s advertising and cloud business are soaring

After Microsoft made a big push into AI, the market was sweating for Google, the previous AI overlord. After all, Microsoft's current onslaught in search, productivity tools, and cloud services all point to Google's key points. In the first quarter of this year, key indicators such as Google's operating profit and earnings per share were also not up to standard, and there was a significant decline.

But this time, **Google has completely withstood the pressure. Not only did the indicators far exceed market expectations, but the advertising business seems to have completely shaken off the decline and returned to a stable growth range. The strong growth of the cloud business is also impressive. **

Google achieved revenue of US$74.604 billion in the second quarter, a year-on-year increase of 7%, far exceeding the market's expected growth of 4.4% and revenue expectations of US$72.77 billion. Although the growth rate has not yet returned to double digits, it has been much better than the 3% year-on-year growth in the previous quarter.

From the perspective of profit indicators, the diluted earnings per share in the second quarter was US$1.44, a year-on-year increase of 19%, which was higher than the market's growth expectation of 9.1%, while this indicator fell by 4.9% year-on-year in the previous quarter; operating profit was US$21.838 billion, The year-on-year growth was nearly 12.3%, well above market expectations of 2.6%, and compared with a 13.3% year-on-year decline in the previous quarter.

Google Earnings Reversed This Quarter, Image via Robinhood

From the perspective of sub-items, Google also swept away the haze of the previous quarter this quarter and won a big victory.

Among them, Google services including advertising, search, maps, YouTube, hardware, Android, Chrome and Google Play recorded US$66.285 billion in revenue, an increase of about 5.5% year-on-year. ** Among them, the performance of the advertising sector was particularly impressive, not only stopped After two consecutive quarters of decline, the growth of the search business and YouTube exceeded expectations. **

In the second quarter, the overall advertising revenue was US$58.143 billion, a year-on-year increase of 3.3%, which was 2.1% higher than the market expectation. Google's search and other related business revenue was US$42.628 billion, a year-on-year increase of approximately 4.8%, which was much faster than the 1.9% growth in the previous quarter. After disappointing the market in consecutive quarters, YouTube grew 4.4% in the quarter, well ahead of analysts' low 1% growth forecast, bringing in $7.665 billion in revenue.

In addition to advertising, the cloud business of the second growth curve that everyone is particularly concerned about has also continued its high growth momentum, and has not suffered the severe impact from AWS and Microsoft Cloud that the market expected.

In the second quarter, Google Cloud’s revenue was US$8.031 billion, an increase of about 28% year-on-year, which was the same as the growth rate in the first quarter and exceeded the market’s expectation of 24.8%. There was no obvious slowdown in growth. **It is worth noting that after Google Cloud made a profit for the first time in history in the previous quarter, the cloud business continued to be profitable this quarter, recording a profit of $395 million, double the $191 million in the previous quarter, and the same period last year. The loss was also as high as 590 million US dollars. **

Google's outstanding financial performance this quarter is also directly reflected in the stock price. After the U.S. stock market closed today, Google’s stock price rose more than 7%.

Although key performance indicators are gratifying, Google did not talk too much about AI and the impact of AI on the business this time. At the financial report meeting, there are two main issues related to AI. **The first is that Google announced a high-level personnel change. Google’s chief financial officer Ruth Porat will serve as the chief investment officer (CIO). She will hold two jobs before Google looks for a new CFO. As CIO, she will be in charge of Google Including global investment in innovative sectors such as AI and autonomous driving. **The second is that Google said it will continue to increase investment in data centers and servers this year, releasing a strong signal for AI services.

Investments in AI have not significantly increased Google's business spending so far. Google’s capital spending for the quarter was $6.89 billion, well below market expectations of $8.01 billion.

Microsoft is still stable overall, but AI is not working as expected

Compared with Google next door, which is full of joy and encouragement, Microsoft, which has made great progress for more than half a year this year, seems a bit tepid this time.

If you use one word to evaluate Microsoft's performance, the word "stable" may be the most appropriate.

Microsoft's key performance indicators for the quarter, while not stunning, were above market expectations. Microsoft’s financial report shows that revenue in the fourth fiscal quarter was US$56.2 billion, an increase of 8% year-on-year. Although it was not as good as the double-digit growth in the same period last year, it was still higher than the market expectation of US$55.49 billion; net profit increased by 20% to US$20.1 billion , and diluted earnings per share were $2.69, a year-over-year increase of 21%.

But from the perspective of the entire fiscal year, **Microsoft's performance this year is slightly inferior. Full-year revenue was US$211.9 billion, a year-on-year increase of 7%, but this indicator has maintained double-digit growth in the past five fiscal years. **

From a sub-business perspective, Microsoft's productivity and business process division (including Office productivity software, LinkedIn and Dynamics) achieved revenue of $18.29 billion, an increase of 10%, exceeding the expected $18.06 billion, of which office consumer products And cloud service revenue increased by 3% year-on-year, Microsoft 365 consumer subscriptions increased to 67 million, and LinkedIn revenue increased by 5% year-on-year.

Revenue in the More Personal Computing business, which includes Windows, devices, games, and search ads, was $13.91 billion, down about 4% year-over-year. Among them, Windows operating system revenue decreased by 12% year-on-year; hardware device revenue decreased by 20% year-on-year; Windows commercial product and cloud service revenue increased by 2% year-on-year; search and news advertising service revenue increased by 8% year-on-year.

It may be seen from this that **Bing search has brought a relatively obvious growth after the integration of AI, but the ability of AI to drive revenue at the Windows system and Office level has not yet appeared. **

In addition to the fact that AI did not work as expected, the performance of Microsoft Cloud this time did not satisfy the market.

Although this quarter, Microsoft’s intelligent cloud business revenue still increased by 15% year-on-year to 23.99 billion US dollars, which was higher than the market’s expected 23.8 billion US dollars. However, Azure and other cloud services business grew only 26%, compared with 31% in the previous quarter, which shows that Azure has slowed down for several consecutive quarters, making people worry about whether the cloud business has entered a stage of weak growth. You know, during the epidemic, Azure has maintained a continuous high-speed growth of 50%.

In a subsequent conference call, Microsoft seemed to confirm this concern. **Microsoft expects Azure revenue growth rate to be 25% to 26% in the first quarter of fiscal year 2024, which also means that the cloud business growth rate will slow down further. **In addition, Microsoft also gave a slightly pessimistic performance guidance. It is expected that the intelligent cloud revenue in the next quarter will be 23.3-23.6 billion US dollars, the personal computing business revenue will be 12.5-12.9 billion US dollars, and the productivity and commercial business revenue will be 180-183 billion US dollars. million, below market expectations.

Growth in the cloud business, however, was not as strong as expected, but its importance to Microsoft is clearly increasing. During the conference call, Nadella said that Microsoft Cloud's annual revenue exceeded $110 billion, with Azure accounting for more than 50% of total revenue for the first time.

In addition to revenue, everyone is particularly concerned about whether Microsoft's AI-induced spending has increased significantly this quarter. And indeed, Microsoft spent $8.94 billion last quarter, beating consensus estimates of $7.85 billion. In the conference call, Microsoft said that the company expects capital expenditures in 2024 to increase quarter by quarter in the 2024 fiscal year, mainly for data centers, CPU chips, GPU chips and network equipment. Signals of big AI investment. **

Affected by the slowdown of Microsoft's cloud business growth and low performance expectations, Microsoft's stock price fell more than 3% after the market.

Although the investment in AI has not been reflected in the performance of this quarter, Nadella also made it clear that he will continue to increase the investment strategy in AI. He said that Microsoft remains focused on leading the new artificial intelligence platform transformation, helping customers use Microsoft Cloud to get the most value from their digital spending and improve operational leverage.

Overall, **Although the last quarter was the climax of generative AI, AI has not brought expected returns to Google and Microsoft. **But judging from the statements of the two companies, the route of increasing AI investment will not change.

Perhaps the real AI battle has not yet begun.