A tale of two cloud platforms. Google Cloud sales continued to soar in its Q2, up 28% year-on-year to more than $8 billion. But over at Microsoft, Q4 Azure revenue growth slipped to 27% from 31% in the preceding quarter with a continued slowdown forecast.
At Alphabet, Google Cloud turned in its second quarter of profitability, hitting $395 million in Q2, up from a loss of $590 million for comparable year-ago quarter. In the post-results analyst call, CEO Sundar Pichai commented:
Our AI-optimized infrastructure is a leading platform for training and serving generative AI models. More than 70% of gen AI unicorns are Google Cloud customers, including Cohere, Jasper, Typeface and many more.
That AI angle was something he returned to later:
It is an exciting moment overall in cloud because there is definitely a lot of interest from customers on AI, and they definitely are engaging in many more conversations with us. So I would say, without commenting on the short term, but when I think about it long term, I view the AI opportunity as expanding our total addressable market and allows us to win new customers. [in terms of the] scale of investments that we can directly bring to cloud now…we have over 80 models across Vertex, Enterprise Search and Conversational AI, and we are taking all of them, translating it into deep industry solutions. So, I'm excited about it.
Second, it gives us an opportunity to upsell and cross-sell into our installed base. So for example, if you think about Duet AI in Google Workspace now, it's a collection of all our generative AI-powered collaboration features. We can bring it and make it available to more than 9 million paying Google Workspace customers. Similarly, with Duet AI in Google Cloud, again, allows us to go back to our installed base and engage in deeper conversations.
Finally, I think AI helps us differentiate our core products. For example, if you take a look at cybersecurity, we are deeply incorporating AI to drive profound changes there. So overall, I'm excited, and I view this as a long-term opportunity. And all the investments we are doing in AI across Alphabet, including the work we are doing in Google DeepMind and Google Research on Gemini and so on are directly applicable to Cloud as well.
But it’s not entirely good news for Google Cloud as CFO Ruth Porat - now promoted to President and Chief Investment Officer of Alphabet - admitted:
GCP revenue growth remained strong across geographies, industries and products. That being said, we saw a continued moderation in the rate of consumption growth as consumers optimize their spend…We are particularly excited about the customer interest in our AI-optimized infrastructure, our Large Language Models, our AI platform services and our new generative AI offerings such as Duet AI for Google Workspace, although we are still clearly in the early days. At the same time, we continue to experience headwinds in the second quarter for moderation in consumption growth as customers optimize their spend. We continue to invest aggressively while remaining focused on profitable growth.
Over at Microsoft, CEO Satya Nadella was quick to point to the positives around the cloud business:
The Microsoft Cloud surpassed $110 billion in annual revenue, up 27% in constant currency, with Azure all-up accounting for more than 50% of the total for the first time. Every customer I speak with is asking not only how, but how fast they can apply next-generation AI to address the biggest opportunities and challenges they face, and to do so safely and responsibly. To that end, we remain focused on three key priorities: first, helping customers use the breadth and depth of Microsoft Cloud to get the most value on to their spend; second, investing to lead in the new AI platform shift by infusing AI across every layer of the tech stack; and third, driving operating leverage.
Azure continues to take share as customers migrate their existing workloads and invest in new ones. We continue to see more cloud migrations, as it remains early when it comes to long-term cloud opportunity. We are also seeing increasing momentum with Azure Arc, which now has 18,000 customers, up 150% year-over-year, including Carnival Corp., Domino's, Thermo Fisher. And Azure AI is ushering in new born-in-the-cloud AI-first workloads, with the best selection of frontier and open models, including Meta's recent announcements supporting Llama on Azure and Windows, as well as OpenAI.
We have great momentum across Azure OpenAI Service. More than 11,000 organizations across industries, including IKEA, Volvo Group, Zurich Insurance, as well as digital natives like Flipkart, Humane, Kahoot, Miro, Typeface, use the service. That's nearly 100 new customers added every day this quarter. Mercedes-Benz, for example, is bringing ChatGPT via Azure OpenAI to more than 900,000 vehicles in the United States, making its in-car voice assistant more intuitive. And Moody's built its own internal copilot to improve productivity of its 14,000 employees.
We're also partnering broadly to scale this next generation of AI to more customers. Snowflake, for example, will increase its Azure spend as it builds new integrations with Azure OpenAI. And KPMG has announced a multibillion-dollar commitment to our cloud and AI services to transform professional services.
But there are “optimization headwinds” to deal with, he admitted:
Overall, in the cloud, you do see new project starts and then those project starts get optimized and then you sort of time-series all of that, and that's sort of what you see in the normal course. What happened here was during the pandemic, obviously, there were lots of new project starts and optimization in some sense was postponed, and that's where you're seeing, I'll call it, catch-up optimization. And that's something that we will lap. Going into the next couple of quarters, I think, it will come down.
We are seeing new project starts, both traditional type of project starts, even cloud migrations, data applications and, of course, obviously, the AI applications. But we'll get back to [what] I’ll call the normal pace of new project starts and optimizations going forward. We will cycle through, I think, in the next couple of quarters, what is the last catch-up optimization.
There’s a lot to be excited about in terms of new workloads, Nadella concluded:
If you think about Azure, we have grown Azure over the years coming from behind. And here we are as a strong number two in the lead when it comes to these new workloads. So, for example, we are seeing new logos, customers who may have used another cloud for most of what they do, or for the first time, sort of starting to use Azure for some of their new AI workloads. We also have even customers who've used multiple clouds who use that for a class of sort of workloads also start new projects when it's transferred in data and AI, which they were using other clouds. So what I think you will see us is more share gains, more logo gains.
The focus of both CEOs on the potential impact of generative AI on their respective cloud strategies moving forward was inevitable in the current tech sector climate. The slowing of Microsoft's cloud revenue didn't sit well with the eternally short-termists on Wall Street, but it was ever thus. Amazon is due to report its latest quarterly numbers next week. How AWS has performed will be of considerable interest.