2023-08-14 15:00:00
Business leaders are winding down their cost-cutting cloud-optimization efforts and are preparing to pump significant new investments into cloud migrations along with cutting-edge deployments of data applications and artificial intelligence (AI) applications, says Microsoft CEO Satya Nadella.
Fresh on the heels of Microsoft’s booming fiscal-Q4 results that saw cloud revenue climb 21% to $30.3 billion, Nadella said that spending on forward-looking business initiatives powered by the cloud will rise as companies prepare for the next wave of tech-powered innovation and its close cousin, disruption.
Underscoring Nadella’s perspective on where Microsoft customers are headed, CFO Amy Hood said the company’s capex will rise significantly throughout Microsoft’s FY24 (July 1 through June 30) to ensure it has the data-center capacity to keep pace with that anticipated jump in demand.
The return of significant cloud spending by customers and the wind-down of what has been an extended “cloud optimization” phase follows an anomalous period of aggressive spending with little optimization during the pandemic, Nadella said during the company’s earnings call last month.
“Overall in the cloud, you do see new project starts, and then those project starts get optimized,” Nadella said.
“And then you sort of time-series all of that, and that’s sort of what you see in the normal course.
“But what happened here was during the pandemic, there were lots of new projects starts, and optimization, in some sense, was postponed. And that’s where you’ve been seeing what I’ll call ‘catch-up optimization.’”
Those catch-up efforts have achieved their objectives, Nadella said, and are paving the way for a fresh round of new investments.
“That catch-up optimization is something that we will lap going into the next couple of quarters — I think it’ll come down — and we are seeing new projects starts, including traditional types of projects starts but also even cloud migrations, data applications and of course, obviously, the AI applications,” Nadella said.
So while cloud optimization as a whole is certainly not going away and will instead remain a fixture of large-scale cloud deployments, the lingering cost-clampdown effects of “catch-up optimizations” are nearing their end.
“So we’ll get back to what I’ll call the ‘normal’ pace of new project starts and optimizations going forward,” Nadella said, “and we will cycle through, I think in the next couple of quarters, what is the last catch-up optimization.”
Later in the call, Nadella emphasized that on top of the bounce-back from the optimization phase, the other massive market dynamic shaping his bullish outlook is that only a small fraction of IT deployments have in fact moved to the cloud. As Nadella put it, “There’s a lot there still.”
Plus, there’s the enormous potential of the generative AI revolution whose financial impacts are only beginning to be felt.
“The way I think regarding it is we still are only in inning two or inning three of even the cloud migration, especially if you view it by industry moves to the cloud, segment moves to the cloud, as well as country adoption of the cloud,” he said.
“This is still early innings of the cloud migration itself — there’s a lot there still. And then on top of that, there is this completely new world of AI driving a set of new workloads.
“And so, we think of that, once more, being pretty expansive from a TAM [Total Addressable Market] opportunity, and we’ll play it out.”
“Play it out” indeed. And the guiding approach in that game for Nadella and Microsoft will no doubt be simple: all in.
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