Competition to expand artificial intelligence (AI) businesses is increasingly becoming a contest over the financial capacity to fund investment. Microsoft (MS) and Google both increased cloud revenue in the third quarter, but differed in their investment burdens. Microsoft retained more cash than expected despite large-scale investment, while Google's investment spending exceeded the cash generated by its business.
According to the July through September results the companies announced on October 28, local time, Microsoft recorded free cash flow of $18.6 billion, approximately 25 trillion won, despite investing $45.2 billion, approximately 60 trillion won, in facilities and other assets. Google parent Alphabet, by contrast, recorded a net outflow of about $9.1 billion, approximately 12 trillion won. Free cash flow is the amount remaining after capital expenditure is deducted from cash generated by business operations. It indicates how much additional investment a company can fund from its own resources.
Both companies' cloud results exceeded market expectations. Microsoft Azure revenue increased 48% year on year to $33.2 billion, approximately 44 trillion won, while Google Cloud revenue rose 103% to $30.7 billion, approximately 41 trillion won. Revenue grew as companies purchased the computing resources and services needed to develop and operate AI.
Market reactions differed after the earnings announcements. According to Reuters, Microsoft's shares rose more than 5% in after-hours trading, supported by stronger-than-expected cash flow and its revenue outlook for the following quarter. Alphabet's shares, by contrast, fell more than 10% as cash outflows increased and advertising revenue and net income missed expectations.
Microsoft cash flow exceeds twice the forecast as advertising results also weigh on Google
Total revenue rose 19% year on year at Microsoft to $92.3 billion, approximately 123 trillion won, and increased 25% at Alphabet to $127.6 billion, approximately 170 trillion won. Both companies increased revenue, but differed in their ability to secure funds for investment.
Microsoft's free cash flow was more than twice the market forecast of $8.54 billion, approximately 11 trillion won. Even while committing substantial funds to facilities such as data centers, the company retained cash available for additional investment or debt repayment.
Its outlook for the following quarter also exceeded market expectations. Microsoft said it expected Azure revenue to grow 49% to 50% in October through December, excluding foreign-exchange effects, and total revenue to reach $96 billion to $97.1 billion, approximately 128 trillion to 130 trillion won.
Alphabet's net cash outflow increased despite cloud growth. It rose from $5.9 billion, approximately 8 trillion won, in the previous quarter to about $9.1 billion in the latest quarter. Capital expenditure exceeded cash generated by operating activities for the second consecutive quarter.
Its core advertising business also failed to meet market expectations. According to Bloomberg, advertising revenue totaled $82 billion, approximately 110 trillion won, below the forecast of $83.6 billion, approximately 112 trillion won. Google explained during its earnings conference call that low monetization of AI Mode had weighed on search-related revenue growth. While revenue from enterprise AI services grew rapidly, the company still faced the task of improving earnings from consumer AI search.
Net income was affected by $8.7 billion, approximately 12 trillion won, in equity investment losses, including its stake in SpaceX. Market assessments of Alphabet reflected not only AI infrastructure spending but also advertising revenue falling short of expectations and investment losses.
Microsoft also signals higher investment as supply delays defer some spending
Microsoft's performance in the latest quarter alone cannot readily be seen as resolving its investment burden. Capital expenditure increased 30% year on year but was below the company's expected $50 billion, approximately 67 trillion won. Some spending was deferred because part of the computing resources due from external suppliers arrived late.
According to Bloomberg, Microsoft Chief Financial Officer Amy Hood said capital expenditure was expected to exceed $50 billion in October through December and increase further early next year. Since the lower spending did not result from reduced investment plans, the company's ability to retain cash even as spending increases has become important to future assessments of its results.
Alphabet also maintained its capital expenditure plan of up to $205 billion this year, approximately 274 trillion won. That is more than twice the previous year's level. Chief Financial Officer Anat Ashkenazi expected capital expenditure to increase substantially again next year. Google also plans to introduce models with improved speed and cost efficiency while expanding its AI infrastructure.
In securing demand to support investment, Microsoft emphasized broadening its customer base. Its aim is to have a diverse range of companies use AI over the long term rather than depend on a few large customers purchasing substantial computing resources over a short period.
'A few customers buying a lot of computing resources and generating growth for a few quarters is not the business I have in mind,' Microsoft Chief Executive Officer Satya Nadella said during the earnings conference call. 'I want a broader customer base.'
Original Korean article: ZDNet Korea
English brief by Korea Wind Intelligence, koreawindintel.com
