Google Cloud's big bet on Gen AI disappoints as business customers pull back on spending

Microsoft (MSFT.O) on Tuesday beat Wall Street estimates for fiscal first-quarter results in all segments, with its cloud computing and PC businesses growing as customers anticipate using its artificial intelligence offerings.

Its forecast also was mostly ahead of analyst targets.

Microsoft, which has heavily backed and collaborated with OpenAI, has yet to roll out most of the products based on its work with the ChatGPT creator. But enthusiasm among corporate technology buyers for features like the ability to summarize heaps of email into a few bullet points or speedily complete lines of computer code helped the company's revenue rise 13% to $56.5 billion in the quarter ended Sept. 30. That compares with analysts' consensus estimate of $54.52 billion, according to LSEG data.

"The results indicated that artificial intelligence products are stimulating sales and already contributing to top and bottom-line growth," said Jesse Cohen, senior analyst at

Microsoft shares were up 3% in after-hours trading.

In the reported quarter, revenue from Microsoft's Intelligent Cloud unit, which houses its Azure cloud-computing platform where much of the AI work will take place, grew to $24.3 billion, compared with analysts' estimate of $23.49 billion, LSEG data showed. Azure revenue rose 29%, higher than a 26.2% growth estimate from market research firm Visible Alpha.

Brett Iversen, Microsoft's vice president for investor relations, said much of the quarterly sales growth came from customers rekindling their use of Microsoft's cloud in anticipation of using AI services.

"What AI is doing ... is opening up either new conversations or extending existing conversations or getting us back in touch with customers that we maybe weren't doing as much with," Iversen told Reuters.

By comparison, Google-parent Alphabet's (GOOGL.O) cloud division missed estimates for third-quarter revenue on Tuesday as an uncertain economy and high-interest rates led its customers to trim their budgets.

"While a single quarter doesn’t a major trend make, this quarter’s cloud results from Microsoft and Google suggest that Azure is gaining share against its competition," said Bob O'Donnell, chief analyst at TECHnalysis Research. "It could be that Microsoft’s very strong messaging on their (AI) technology is getting companies to consider them in a more serious way."

Smartphone is seen in front of Microsoft logo displayed in this illustration

Smartphone is seen in front of Microsoft logo displayed in this illustration, taken July 26, 2021. REUTERS/Dado Ruvic/Illustration/File Photo Acquire Licensing Rights

Microsoft said fiscal first-quarter profit was $2.99 per share, above analyst estimates of $2.65 per share, according to LSEG data.

"There are some weaker areas; search advertising revenues, for one, is growing slower than most segments," said Jeremy Goldman of research firm Insider Intelligence.

Microsoft said search and news advertising revenue excluding traffic acquisition costs increased by 10%. It does not break out the revenue figure for these operations.

Microsoft is weaving AI into its own products, such as the $30-a-month "Copilot" for its Microsoft 365 service that can summarize a day's worth of emails into a quick update. While the tool is being shown only to a small number of pilot customers until it becomes available next month, it requires businesses to make a number of upgrades to their Microsoft-based systems in order to use Copilot.

Investors are also tracking how much Microsoft spends on the massive data centers to power AI software. Microsoft said on Tuesday that fiscal first-quarter capital expenditures were $11.2 billion, up from $10.7 billion in the previous quarter, which itself was the biggest spend since at least fiscal 2016. Microsoft executives say that figure is likely to grow each quarter this fiscal year, putting the company on track to spend more than $44 billion.

Sales of its Windows operating system and other products in the segment grew to $13.7 billion, compared with analysts' consensus estimate of $12.82 billion, according to data from LSEG.

The segment containing the LinkedIn social network and its office productivity software grew to $18.6 billion, compared with analysts' consensus estimate of $18.20 billion, according to LSEG data.

For its fiscal second quarter, Microsoft forecasted an Azure growth rate of 26-27% in constant currency, above analyst estimates of 25.1% according to Visible Alpha. The company forecast revenue of $25.1 billion to $25.4 billion for the segment that contains Azure, ahead of estimates of $24.94 billion, according to LSEG data.

In Microsoft's Windows-based business segment, the company forecast fiscal second-quarter sales of $16.5 billion to $16.9 billion, above estimates of $14.52 billion, according to LSEG data. The forecast includes revenue from Microsoft's Activision gaming acquisition, and it was not immediately clear if analyst forecasts included that addition.

The company forecast sales of $18.8 billion to $19.1 billion for the business segment containing LinkedIn, mostly above expectations of $18.83 billion, according to LSEG data.

A strike by auto workers against General Motors is expected to cut pretax earnings by $800 million this year, and another $200 million per week after that, the company’s chief financial officer said.

And those figures include only factories that are on strike now, so if more plants are added by the United Auto Workers union, the losses will pile up further, CFO Paul Jacobson told reporters.

The strike is already taking a toll, and shortly after the conference call the UAW expanded the strike to Arlington, Texas, one of GM’s most profitable plants. Five thousand workers walked off their jobs at the factory which makes SUVs.

Shares of General Motors Co. are down more than 13% this year, touching lows Tuesday that haven’t been seen since the pandemic when the company’s sales growth tumbled almost 11% in 2020.

GM on Tuesday posted a net income of more than $3 billion from July through September, down 7% from the same period last year due to lost production from the strike, and also increased warranty costs, Jacobson said. The company also withdrew its previous full-year pretax earnings estimates, citing uncertainty over the length of the strike and how many factories would be shut down

However, excluding one-time items, GM said made $2.28 per share, handily beating Wall Street estimates of $1.87. Revenue of $44.13 billion rose 5.4% and also exceeded estimates of $42.48 billion, according to data provider FactSet.

The UAW has been on strike since Sept. 15 — nearly six weeks — against GM and its Detroit competitors, Ford and Jeep maker Stellantis. The union had spared factories that make GM’s most profitable vehicles, pickup trucks and large SUVs, from its targeted strikes. Yet the UAW is demonstrating this week that risks to those money-making facilities can rise the longer the strike goes on.

On Monday, the union shut down Stellantis’ huge Ram pickup truck plant north of Detroit in Sterling Heights, Michigan. Two weeks ago workers walked off their jobs at Ford’s largest and most profitable plant, one that makes pickups and big SUVs in Louisville, Kentucky. So far only 28% of the union’s 146,000 members at the Detroit Three are on strike.

Jacobson said the third-quarter strike loss was $200 million since the walkouts were only in effect for the final two weeks of the period. He predicted another $600 million of losses from October through December.

In a note to shareholders, CEO Mary Barra said GM has made a record offer to the union that will raise top factory pay to $40.39 per hour, or roughly $84,000 per year in four years. She indicated that the company is nearing how much it’s willing to pay.

“It’s an offer that rewards our team members but does not put our company and their jobs at risk,” Barra wrote. “Accepting unsustainably high costs would put our future and GM team member jobs at risk, and jeopardizing our future is something I will not do.”

Union President Shawn Fain says the companies are making billions and paying millions to CEOs, so they can afford to pay workers more.

Edward Jones analyst Jeff Windau said investors are concerned about the financial hit from a longer strike, GM slowing electric vehicle production, and whether it can squeeze out more cost cuts to offset a deal with the union.

“Our concern is generally making sure the automakers have that flexibility to be able to navigate through a cyclical downturn,” he said Tuesday.

Jacobson said many have expressed concerns about GM taking on higher labor costs, but the company has planned for it by cutting in other areas. For example, GM’s annual fixed costs will be $2 billion lower than 2022 by the end of 2024, Jacobson said. The company also is slowing electric vehicle production to adjust to slower short-term growth in demand.

Last week GM announced that it’s postponing production at one Michigan electric pickup truck factory from this year until late 2025 to keep manufacturing in line with demand. That decision will save the company $1.5 billion next year, Jacobson said.

Barra said the transition to EVs will be “a bit bumpy” at times, but GM is prepared to react with agility. As an example, she cited the company’s plan to resurrect the Chevrolet Bolt small EV, which the company was to stop making at the end of this year. Now, the company will take the attributes of the current Bolt and add new batteries and other technology to roll out a new vehicle in 2025. “It will require a lot less capital” to make the new version, she said, “while leveraging the strong customer enthusiasm we have for the Bolt EV.”

GM is sticking with plans to increase manufacturing capacity to 1 million EVs per year in North America by the end of 2025, he said. But earlier guidance of building 400,000 EVs in North America through the middle of next year has been scrapped. Jacobson said GM still expects to start turning low-to-mid single-digit profit margins on electric vehicles in 2025.

Demand for vehicles and prices remained strong through the third quarter, which helped keep GM’s profit high. The company’s U.S. sales rose 21%, and Jacobson said the average U.S. selling price for GM vehicles was $50,750, down only slightly from the previous quarter.

“So far the consumer has held up remarkably well for us, as evidenced by the average transaction prices,” Jacobson said. “They continue to hang in and I think exceeded most expectations that were set at the beginning of the year.”

Jessica Caldwell, head of insights for the auto site, said GM’s sales numbers looked good on the surface, but that could change in the next few months. As cold weather arrives, those in the market are usually looking for larger four-wheel-drive vehicles. But she said a lingering strike could close plants, cut production of those lucrative vehicles, and “be harbingers of sales declines during an important stretch of the calendar ahead.”

 Alphabet’s cloud momentum waned in the third quarter, causing shares of the Google parent company to dip more than 5% in after-hours trading on Oct. 24.

Google Cloud revenue was up 22.5% compared with last year’s third quarter, to $8.41 billion. But that missed Wall Street revenue estimates of $8.6 billion and marked the division’s slowest growth since the first quarter of 2021.

While cloud growth is “strong across geographies, industries, and products,” Alphabet CFO Ruth Porat said during an earnings call, the below-forecast expansion rate “reflects the impact of customer optimization efforts,” a signal that customers are pulling back on their spending.

This is a far cry from a more optimistic tone by Alphabet CEO Sundar Pichai last quarter, when he boasted that “more than 70% of gen AI unicorns are Google Cloud customers” and that the company’s “AI-optimized infrastructure is a leading platform for training and serving generative AI models.”

Google has been trying to play catch-up in the generative AI space ever since Microsoft’s surprise investment in OpenAI firmly placed it in the number one spot in the AI race. Based on Microsoft’s 29% increase in cloud revenue in the recent quarter, it appears to be putting more distance between itself and its rival.

Awaiting “exciting progress”

As Rohit Kulkarni, Roth MKM’s managing director, told Yahoo Finance, Google is the “godfather of AI” but “they’re still in search of that killer AI app.

Alphabet’s effort to integrate AI into products ranging from its search engine to its Workspace tools still may be in its infancy, however.

“We’re continuing to focus on making AI more helpful for everyone; there’s exciting progress and lots more to come,” said Pichai in a statement.

Alphabet’s performance for the third quarter, by the digits:

$76.69 billion: Total revenue beat estimates of $75.96 billion

$1.55: Adjusted earnings per share beat estimates of $1.44

$19.69 billion: Net income beat estimates of $18.52 billion

$59.7 billion: Google’s advertising business beat revenue estimates of $58.9 billion—a 9% increase from a year before.

$8.41 billion: Google’s cloud business sales fell short of the estimated $8.6 billion

$44 billion: Google search ad revenue

$7.95 billion: YouTube’s ad revenue beat estimates of $7.81 billion

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