Microsoft sees AI making 'gradual' growth contributions
In a year where hype over artificial intelligence has sent stocks soaring, Microsoft (MSFT) management reminded investors on its fiscal fourth quarter earnings call that the technology's contributions to revenue won't happen overnight.
"With strong demand and a leadership position, growth from our AI services will be gradual as Azure AI scales and our Copilots reach general availability dates," Microsoft CFO Amy Hood said on an earnings call Tuesday night. "So for FY'24, the impact will be weighted towards [the second half of the 2024 fiscal year]."
Microsoft's stock had shot up more than 40% on the year entering Tuesday's highly anticipated earnings report as the tech giant's investments in artificial intelligence have sparked investor interest. As recently as last week, a Microsoft AI product pricing announcement sent shares to all-time highs.
But on Tuesday's call, the AI hype failed to send the stock higher, as slowing Azure growth sent shares more than 3% lower on Wednesday morning.
"Q4 results were satisfactory, but lacked the spice investors may have been salivating for following a blistering pace of GenAI + new product innovations and press releases during the quarter," Citi analyst Tyler Radke wrote in a note on Wednesday morning.
On July 18, Microsoft announced pricing for its Copilot product that will bring AI solutions to its Microsoft 365 customers. Wall Street analysts celebrated the announcement by boosting their 12-month price targets, projecting shares would continue to rise higher.
On Tuesday night's earnings call Microsoft management tempered those expectations, emphasizing AI would be a key growth driver moving forward, just not necessarily in the immediate quarter. Hood noted that the demand and customer reaction for Copilot has been "encouraging."
But first, the company has to work through its paid preview of the product and receive feedback. Then, there will be a general availability date released followed by a general audience release. Hood didn't give a specific timeline for the process.
"Then, we'll of course be able to sell it and recognize the revenue," Hood said, adding: "I do think this is really about pacing."
Jefferies analyst Brent Thill noted that the commentary around when AI will push revenues "may have been later than some investor aspirations, although [the] timing remains logical as this is a decade-long transformation."
Microsoft CEO Satya Nadella began Tuesday's call by highlighting the various AI triumphs for the company that many on the Street view as an AI leader. More than 11,000 organizations including Ikea and Volvo are using Azure Open AI service. More than 27,000 organizations including Airbnb and Dell are using Microsoft's GitHub Copilot, which includes a ChatGPT-like assistant.
But after a year of positive announcements sending shares higher, investors appeared more focused on what Microsoft didn't say during its earnings call.
When asked directly if the sequential drop in Azure revenue growth had "bottomed," Microsoft management didn't provide a clear guide.
"[It is] still early innings of the cloud migration itself, so there's a lot there still," Nadella said. "And then on top of that, there's this complete new world of AI driving a set of new workloads ... We do think that this is a business that can have sustained high growth, which is something that, we are excited about."
The company guided for Azure revenue growth in the current quarter of 25%-26%, with two points of that growth attributed to "AI Services." However, when discussing the outlook for the full year, Microsoft did not provide explicit revenue guidance nor did it specify how much AI will contribute.
In the fiscal year 2023 that Microsoft discussed on Tuesday, Microsoft's revenue increased by 7%, the lowest rate of annual growth since 2017.
"Some investors were disappointed at the lack of FY top line guidance, which could be viewed as a lack of commitment to potential revenue re-acceleration," Thill wrote. "We have continued conviction that MSFT has the ability to be a high-single-digit/low-double-digit rev grower as comps ease, consumption improves & AI tailwinds emerge."
Josh Schafer is a reporter for Yahoo Finance.
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