The most anticipated and closely watched earnings day of this quarter has arrived, with both Google and Microsoft releasing their quarterly reports on the same day.
The ongoing battle between these two tech giants in the AI sector has been tense over the last quarter. With Google I/O and Microsoft Build holding their annual events consecutively, both companies unveiled AI model updates and product releases in rapid succession. But the question on everyone's mind is whether AI has really brought them users and revenue, and which of the two companies performed better?
Below, let's find the answers in their latest quarterly financial reports.
Google Thrives Amid Microsoft's Challenge, Advertisement and Cloud Businesses Soar
Following Microsoft's aggressive entry into AI, the market was understandably anxious for Google, the former undisputed champion in the AI sector. After all, Microsoft's fierce attacks on search, productivity tools, and cloud businesses targeted Google's vulnerabilities. In the first quarter of this year, key indicators such as operating profit and earnings per share for Google didn't meet expectations, showing a significant decrease.
However, Google withstood the pressure this time, far exceeding market expectations with its advertising business seeming to shake off its downturn and return to steady growth. Its cloud business's strong growth also turned heads.
In the second quarter, Google achieved revenues of $74.604 billion, a year-on-year increase of 7%, far exceeding the market's anticipated growth of 4.4% and an expected revenue of $72.77 billion. Although the growth rate hasn't returned to double digits, it is much better than the 3% year-on-year growth in the previous quarter.
Looking at the profit indicators, diluted earnings per share for the second quarter were $1.44, a year-on-year increase of 19%, surpassing the market's predicted growth of 9.1%, while this indicator fell 4.9% year-on-year in the previous quarter. Operating profit was $21.838 billion, a year-on-year increase of nearly 12.3%, much higher than the market's expected 2.6%, while it fell 13.3% year-on-year in the previous quarter.
Google Services, including advertising, search, maps, YouTube, hardware, Android, Chrome, and Google Play, recorded a revenue of $66.285 billion this quarter, a year-on-year increase of approximately 5.5%. Among these, the advertising segment performed exceptionally well, halting two quarters of consecutive declines, with the growth of search business and YouTube exceeding expectations.
Total advertising revenue in the second quarter was $58.143 billion, a year-on-year increase of 3.3%, higher than the market's expected 2.1%. Google's search and other related business revenue were $42.628 billion, a year-on-year increase of about 4.8%, accelerating a lot compared to the 1.9% growth in the previous quarter. YouTube, after several disappointing quarters, grew by 4.4% this quarter, significantly exceeding analysts' low growth expectation of 1%, and recorded revenue of $7.665 billion.
In addition to advertising, the other significant area of growth was in cloud services, which continued its high growth trend and was not severely impacted by market expectations from AWS and Microsoft's cloud offerings.
In the second quarter, Google Cloud's revenue was $8.031 billion, a year-on-year increase of approximately 28%, keeping pace with the growth in the first quarter and exceeding the market's expectations of 24.8%. Notably, after Google Cloud achieved its first-ever profit in the last quarter, it maintained profitability this quarter, recording a profit of $395 million, doubling the $191 million from the previous quarter, while in the same period last year, the loss was as high as $590 million.
Google's outstanding financial performance this quarter is directly reflected in its stock price. Today, in after-hours trading, Google's stock price surged over 7%.
Although the key performance indicators are promising, Google did not discuss AI or the impact AI has brought to its business in depth. At the earnings call, there were two main AI-related issues. First, Google announced a high-level personnel change; Google's CFO Ruth Porat will serve as the Chief Investment Officer (CIO). Before Google finds a new CFO, she will hold both positions. As CIO, she will be responsible for Google's global investment in innovative departments, including AI and self-driving cars. Second, Google stated that it will continue to increase investment in data centers and servers this year, sending a strong signal for AI services.
Investments in AI have not significantly increased Google's business expenditures for the current quarter. Google's capital expenditure this quarter was $6.89 billion, significantly lower than the market expectation of $8.01 billion.
Microsoft Remains Steady, but AI Falls Short of Expectations
In contrast to Google, which is jubilant next door, Microsoft, which had been advancing briskly for more than half a year, seems somewhat lukewarm this time.
If there's one word to describe Microsoft's performance, it would be "steady."
Although Microsoft's key performance indicators for this quarter were not dazzling, they exceeded market expectations. Microsoft reported fourth-quarter revenues of $56.2 billion, a year-over-year increase of 8%. While it did not reach double-digit growth like the same period last year, it still exceeded the market expectation of $55.49 billion. Net profit grew by 20% to $20.1 billion, and diluted earnings per share were $2.69, a year-on-year increase of 21%.
However, looking at the full fiscal year, Microsoft's performance was somewhat lackluster. The total annual revenue was $211.9 billion, a year-over-year increase of 7%, but in the past five fiscal years, this indicator maintained double-digit growth.
Looking at the individual business sectors, Microsoft's Productivity and Business Processes department (including Office productivity software, LinkedIn, and Dynamics) achieved revenue of $18.29 billion, a growth of 10%, exceeding the expected $18.06 billion. Among them, the revenue of Office consumer products and cloud services increased by 3% year-on-year, the number of Microsoft 365 consumer subscriptions increased to 67 million, and LinkedIn's revenue increased by 5% year-over-year.
The More Personal Computing business, which includes Windows, devices, games, and search advertising, saw revenue decline by about 4% year-over-year to $13.91 billion. Within this, Windows OS revenue fell by 12% year-on-year; hardware device revenue fell by 20% year-on-year; Windows commercial products and cloud services revenue increased by 2% year-on-year; revenue from search and news advertising services grew by 8% year-on-year.
Perhaps we can see from this that the integration of AI into Bing search has led to noticeable growth. However, the AI at the Windows system and Office level has not yet demonstrated its ability to drive revenue.
Apart from AI not performing as expected, Microsoft's cloud performance also did not satisfy the market.
Although the revenue from Microsoft's Intelligent Cloud business still grew by 15% year-over-year to $23.99 billion this quarter, higher than the market expectation of $23.8 billion. But Azure and other cloud services business only grew by 26%, down from 31% in the previous quarter. This shows that Azure has been slowing down for several consecutive quarters, raising concerns about whether the cloud business has entered a phase of lackluster growth. Keep in mind, during the pandemic, Azure maintained 50% high-speed growth for some time.
On the subsequent earnings call, Microsoft seemed to confirm these concerns. Microsoft expects Azure's revenue growth rate for the first quarter of fiscal 2024 to be 25% to 26%, which means the cloud business growth will further slow down. In addition, Microsoft provided somewhat pessimistic performance guidance, forecasting revenues of $23.3-23.6 billion for Intelligent Cloud, $12.5-12.9 billion for Personal Computing, and $18-18.3 billion for Productivity and Business Processes, all below market expectations.
However, although the growth of the cloud business is not as strong as expected, its importance to Microsoft is clearly increasing. On the earnings call, Nadella stated that Microsoft Cloud's annual revenue exceeded $110 billion, with Azure's revenue for the first time accounting for more than 50% of total revenue.
Beyond revenue, a key point of interest is whether Microsoft's spending spurred by AI has significantly increased this quarter. Indeed, it has, with Microsoft's expenditure last quarter being $8.94 billion, higher than the market expectation of $7.85 billion. On the earnings call, Microsoft stated that it expects capital expenditure to grow quarter by quarter in fiscal 2024, mainly to be used in data centers, CPU chips, GPU chips, and network equipment, like Google, it also signals a continued increase in AI investment.
Due to the slowdown in Microsoft's cloud business growth and lower performance expectations, Microsoft's stock price fell by over 4% in after-hours trading.
Although AI investments have not yet reflected in this quarter's earnings, Nadella clearly stated that the AI investment strategy would continue. He said Microsoft remains focused on leading the new artificial intelligence platform transformation, helping customers get the maximum value from their digital expenditures using Microsoft Cloud, and improving operating leverage.
Overall, although the last quarter was a climax for generative AI, AI has not yet brought the expected returns for 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.
