00:03:10 · Gil Luria, Ed Elson
[00:03:10] S5: That it was a clean beat across the board. So not only was the Azure business great, it accelerated from 43 to 48%. This is a $120,000,000,000 plus business. Those are tremendous growth rates at better margins. But also the rest of the business, the non AI business performed well enough that that translated to overall revenue beat, earnings beat, better guidance than expected, a clean beat and raise, which is why the stock is up, and importantly, is the company that still has positive cash flow. Can't say that about Amazon, Google, and Meta. It is true about Microsoft. And right now, that's what investors wanna hear. [00:03:51] S6: That's what I was gonna bring up, which is their free cash flow is still positive. Cannot say the same about Amazon or Google or Meta, which it... That statement in and of itself is quite striking. But it came down significantly, down 27%. Basically, they're spending ridiculous amounts on data centers, but not so ridiculous that their cash flow is negative. I guess talk more about their their spending plans here when it comes to AI.
00:04:25 · Gil Luria
[00:04:25] S5: So what Microsoft does slightly different, it's different than Amazon and slightly different than Google, is they've been relying on overflow capacity from Neo Clouds. So they don't need to build all the data center capacity to meet their customer needs. They just need to build enough that they have good visibility. So they're making fifteen year commitments on a significant portion of their build on, but then they're saying, you know, that doesn't meet demand right now. Let's go get some of the compute elsewhere on short term contracts with these neo clouds that we can still provide what our customers want, but we don't have to spend as much on CapEx. Not to mention the fact that they just have a more profitable business. So the combination of those two things means they can stay free cash flow positive. The reason that's important is that that means they don't have to go to the capital markets. Right? We saw Google with a debt raise and an equity raise. They're still issuing stocks in an out of the market offering. We saw Meta sell stock, and and they're gonna have to borrow, and they're doing special purpose vehicles. Microsoft doesn't have to engage in that. They have positive cash flow even if it is lower, so they don't have to raise capital again. That makes them look better. They're all spending a lot, but Microsoft's doing it a little bit more responsibly, and and sometimes that's all you need to get the credit from investors.
00:05:47 · Ed Elson
[00:05:47] S6: You say it makes them look better. Do you believe that it is better? That it that it that it puts them in a genuinely stronger position? Because that seems to be... To me, that seems to be the big question and the most important question, which is, like, where's the money gonna come from? And if you have to raise it from someone else, which is what we're seeing with Meta, and I'm looking at Meta, which got... Gotten crushed this week, That's kind of a problem, especially if the money for whatever reason dries up. I don't think it will in the case of big tech, but we have seen a lot more pressure on some of those smaller names like the NeoClouds. It seems like Microsoft is in a genuinely stronger position than the rest of the hyperscalers.
00:06:30 · Gil Luria, Ed Elson
[00:06:30] S5: Yes. Absolutely. And and and part of it is that they they have thought... They they have a much more thoughtful approach. Again, they're taking some longer term investments, some shorter term capacity. They're limiting themselves to what they have. Again, they're still expanding their biz... 48% growth in Azure, but still accelerating on a $120,000,000,000 business. Still tremendous growth. It's drawing other revenue. That's important because Microsoft on top of the AI compute is also selling a lot more enterprise software, a lot more infrastructure software, a lot more application software, bumping up the tiers for companies that use Windows and Office products. They're leveraging AI to do that so they can have the resources and they can just draw the limit to say, you know, let's not spend more than what we have. We're generating a lot of cash flow. This is a good return. It's helping the rest of our business. But if we don't spend more than we have, we don't have to borrow. We don't have to be beholden to the capital markets, which we've now seen what the capital markets are doing to Meta. Microsoft doesn't have to engage in that. [00:07:36] S6: Okay. Let's shift to Google. So Google revenue was up 25%. Cloud revenue was up 103% is what I have here. The stock immediately tanks. What are investors reacting to?
00:07:54 · Gil Luria
[00:07:54] S5: It's not the cloud business. Cloud business is doing great. To your point, doubling. And again, doubling to $120,000,000,000 is a lot. Part of it is TPU sales now. A lot of it is the momentum in Anthropic. Talked about Anthropic decelerating, but still added a lot of revenue. And a lot of that goes in referral fees and compute fees to Google Cloud. So that part of the business was great. If that's all they reported, stock would be up. It's the other part. It's that core advertising business. We have long been worried that that business would be negatively impacted by AI. And it is Google Search that was the big weakness. If people stop Googling and start GPTing, that means less ad sales. And they've been able to assuage those concerns for the last couple of years and keep nice growth rates within Google Search. But this quarter, it appeared to abruptly slow down. They're talking about having tough comps, but that's an abrupt slowdown that nobody expected. And sound... And now investors are gonna ask themselves, is it happening? Is the shift to AI now now mean that that very... That the most lucrative business Google has ever been in, which is selling search ads, is that business gonna be impacted? That's why you're seeing that big step down in the stock, is that that's the core cash generator. If that's suffering, and by the way, it's not the ad market that's the problem. Meta accelerated growth to the high 20s last week. Meta is now growing more than twice as fast in the digital advertising business than Google. They're gaining a lot of share. The concern seems to be specifically about what Google is doing in in search advertising.
00:09:42 · Ed Elson, Gil Luria
[00:09:42] S6: Do you believe that that is what is happening? Do you believe that, And to be clear, it's not that the the search revenue is is falling, but the growth is is slowing down. And part of me thinks, well, this is a gigantic business to begin with. A slowdown in growth, I'm not necessarily that surprised by, but do you think that it is genuinely a reflection of people are not using the product as much because they're using other products. They're using ChatGPT. They're using Claude. They're using all of these things that everyone was so afraid would eat Google's lunch at some point. [00:10:20] S5: It's too early to tell. Right? One quarter [00:10:23] S6: Okay.