Microsoft and IBM Q4 Earnings Reveal AI's Impact on Cloud and Enterprise Tech Landscape

Analysis: What Microsoft's Q2 Says About Its Channel, AI, Cloud, DeepSeek

'DeepSeek has some real innovations. Obviously, now that all gets commoditized. And it's going to get broadly used. And the big beneficiaries of any software cycle like that is the customers,' says Microsoft CEO Satya Nadella. Microsoft's disappointing results in its Azure cloud business in its latest quarterly earnings revealed that wins in the artificial intelligence space can have unintended effects on its cloud business. But don't write off the AI revolution and don't consider the door closed on cloud adoption. The Redmond, Wash.-based tech giant's leadership cast some of the blame on Azure's performance of 31 percent growth year over year -- the low end of Microsoft's forecast and a deceleration from 33 percent to 35 percent the prior three quarters -- on the vendor's partner sales motion, with an imbalance of investments, marketing dollars and employees to make sure AI work didn't take away from bread-and-butter migration and fundamentals work. Microsoft CFO Amy Hood said to expect the issues to continue into at least the next quarter, forecasting Azure growth next quarter at 31.5 percent year over year, "modestly below expectations," according to investment firm William Blair. Microsoft's "intelligent cloud" segment, which includes revenue contribution from Azure, missed Wall Street expectations by about $300 million. Hood forecast the segment to bring in $25.9 billion to $26.2 billion next quarter, less than the Wall Street consensus of $26.9 billion. It should be noted foreign exchange rates are also a factor for lower revenue guidance throughout the business segments. [RELATED: Microsoft Partners Weigh In On Channel 'Challenges' After CFO Comments] CRN has reached out to Microsoft for further comment. Members of Microsoft's 400,000-member partner ecosystem have echoed some of Hood's observations in interviews with CRN, noting that so many Microsoft customers still have room for cloud adoption and upgrades in security and collaboration application Teams. While it's not clear that the executive move is related to Hood's comments, Microsoft revealedafter the earnings call a new partner organization headed by its former president of the vendor's Europe, the Middle East and Africa business. Concern over the partner program and performance in non-AI Azure shouldn't distract from better-than-expected results in Microsoft's AI wares and productivity applications suites -- both areas with solution provider attachment. And with Microsoft and its rivals spending billions to win the AI race, and AI looking to remake work for entire industries and transform what it means to be a salesperson, a programmer and a host of other job roles, it's no surprise that this emerging technology area holds Microsoft's focus. Microsoft Chairman and CEO Satya Nadella (pictured) dismissed handwringing over China-based DeepSeek upheaving the vendor's massive $80 billion AI spending plans, saying in essence whatever advancements DeepSeek has found will be adopted by all AI vendors. And DeepSeek's possible success launching a competitive AI model at a fraction of the understood training cost could be a sign that AI is getting less expensive and that more users will have the ability to adopt the technology, perhaps marking faster mass penetration than previously thought. Microsoft's stock fall could be a reckoning brought on by DeepSeek hype. It could be Microsoft customers past the stage of getting dazzled by AI and wanting to see the return on investment and the killer application and apps that reward the early AI adopters. Here's more of what Microsoft's results show about its channel partner program as well as its performance in AI and cloud. Enterprise and partner services revenue fell 1 percent year over year during the quarter, according to the vendor. Hood cited "go-to-market execution challenges" with "customers we reach through partners and through more indirect methods of selling," attributing the challenges to the time it took to implement changes made in the summer -- Microsoft's fiscal year started July 1 -- around balancing AI work with "migrations and other fundamentals." "As you do that, you learn with your customers and with your partners on sort of getting that balance right between where to put our investments, where to put the marketing dollars, and importantly, where to put people in terms of coverage and being able to help customers make those transitions," she said. Hood told analysts on the call that Microsoft is "going to make some adjustments to make sure we are in balance because when you make those changes in the summer, by the time it works its way through the system, you can see the impacts and whether you have that balance right." But she expects "impact" through the second half of Microsoft's fiscal year. While it's not clear that the executive move is related to Hood's comments, Microsoft planned to move Ralph Haupter to the role of president of the new Small, Medium Enterprises and Channel organization Feb. 1, according to a LinkedIn post Thursday. It was not immediately clear how the new organization fits with the Global Partner Solutions organization headed by Microsoft Corporate Vice President and Chief Partner Officer Nicole Dezen. One analyst firm understood Hood's comments to mean that 150,000 partner customers have tried out and invested in GenAI, contributing to Azure AI revenue. But those customers delayed implementing, rolling out and expanding traditional workloads based on CPUs, according to a Bernstein report Thursday. That showed up in the numbers as slower Azure growth and a deceleration in Azure revenue that didn't come from GPUs. Although enterprises creating separate, dedicated AI budgets this year instead of borrowing from other budgets for AI experiments should help cloud migrations and non-AI projects, Microsoft's lower-than-expected guidance for the next reported quarter shows the vendor expects issues to continue for now. Microsoft said to expect 31 percent to 32 percent growth ignoring foreign exchange, implying more than 19 percent growth in non-AI Azure, Bernstein said. The Wall Street consensus was for 32 percent to 33 percent. "We would really be surprised not to see improvement and an Azure beat next quarter and a guide to Azure acceleration for Q4," according to the Bernstein report. "Our comment to management: You have shown that you can deliver AI revenue better than competitors and better than we expected, but now you need to deliver on the core Azure revenue and we very much believe you can do it." Microsoft partners told CRN about a variety of issues with the partner program, including high bars for badging that change too often and an overemphasis on AI and Copilot over bread-and-butter work such as cloud migrations. Customers feel that "sorely needed features, enhancements, and fixes to core products" have been put to the side "in favor of trying to build a Copilot into everything," said one Microsoft solution provider who asked for anonymity to speak frankly about the tech giant. "That is causing a lot of frustration," he said. "Customers view Microsoft 365 Copilot as still being in its infancy and are not realizing the value that Microsoft continues to claim it provides." Microsoft needs a balance between AI innovation and services that have made it and partners essential to so many business customers, he said. Microsoft leadership sought to quell concerns about competition from DeepSeek, which appears to have created competitive AI models at a fraction of the cost of AI rivals. "DeepSeek has some real innovations," Nadella said on the call. "Obviously, now that all gets commoditized. And it's going to get broadly used. And the big beneficiaries of any software cycle like that is the customers." Just before Wednesday's call, Microsoft revealed in a blog post that DeepSeek R1 is now available in the model catalog on Azure AI Foundry and GitHub. However, multiple news outlets also reported that Microsoft and Microsoft-backed OpenAI were investigating whether DeepSeek improperly accessed OpenAI data. In a Thursday report, one investment firm crowned Microsoft a superior AI vendor for its focus on model flexibility and inferencing over training. "Most other AI infrastructure providers are focused on training which is lower margins, less sticky and more impacted by the changing dynamics of the model business as recently seen with the DeepSeek announcements," according to Bernstein. KeyBanc praised Microsoft's response to DeepSeek as well the vendor's signaled flexibility in capital spending. "By embracing DeepSeek with open arms in embedding the model offering across Azure and Copilot use-cases ... Microsoft was able to walk the tight line between beneficiary from potentially disruptive forces in its applications businesses and indifferently distancing itself from dependence on the brute force AI build-out in its infrastructure business where ROI grumbles have grown in decibels," according to the investment firm. "We are taking the under on DeepSeek's long-term impact on AI and believe that AI capex will prove stickier than ROI hawks would hope." William Blair said that "Microsoft does not see DeepSeek fundamentally altering its capex outlook or the need for greater computing resources" in a Thursday report. "In fact, as AI models become more efficient, AI consumption/inferencing should naturally increase, resulting in a subsequent uptick in computing demand," the investment firm said. Turning to Microsoft's product portfolio, for partners going all in on the AI era Microsoft shared plenty of milestones to show the emerging technology is bringing in business, even as the vendor sorts out capital expenditures and tries a variety of business models. Wins in the Microsoft AI product portfolio shared by leadership include AI services reaching a $13 billion annual run rate revenue instead of the forecast $10 billion. Copilot's number of daily users doubled quarter over quarter and customers who bought Copilot in the first quarter of adoption have increased their seats tenfold over the past 18 months, according to the vendor. GitHub Copilot now serves about 150 million paid subscribers. That $13 billion of AI annual run rate is likely about $10.2 billion Azure AI and about $2.8 billion SaaS copilots -- which exclude GitHub Copilot and Security Copilot. Bernstein estimated that Copilot has been sold to 2.4 percent of the commercial Office 365 install base. Bernstein called the SaaS copilots money "a nice surprise" and guessed that Copilot Studio, Copilot for Sales and Copilot for Service were a "meaningful portion" of the revenue. Azure AI contributed 13 percentage points to overall Azure growth, more than double year over year. Azure AI likely brought in $1.8 billion in the quarter. Microsoft 365 Copilot likely brought in $1.2 billion, according to William Blair. "The broad application of AI copilots across different lines of business is helping expand Microsoft's wallet opportunity beyond traditional IT spend as companies across all industries trial these productivity-enhancing solutions," the investment firm said in a report Thursday. Microsoft's position as a gateway for capitalizing on the AI agent creation trend "is underappreciated," Melius Research said in a report Thursday. While Hood spent time laying out execution issues in non-AI Azure sales, the vendor did report positive momentum in some cloud wares and in productivity packages many Microsoft solution providers sell. William Blair called Microsoft 365 Commercial Cloud growth of 15 percent year over year "ahead of expectations." Greater adoption of the E5 license -- work that sometimes comes from solution providers -- helped fuel the growth. Bernstein's report added that "Commercial Cloud will become a larger and larger portion of the business going forward." "While the Cloud story is far from over for Microsoft, especially with Azure, and AI could become relatively quickly the next leg of growth for Commercial Cloud and overall Microsoft," according to the firm. Seat growth was 7 percent, driven by SMBs -- a typical solution provider customer -- and frontline worker offers. Bernstein called Dynamics 365 growth of 18 percent year over year ignoring foreign exchange "strong." The upcoming Windows 10 end of support appeared to help growth in Microsoft's "more personal computing" segment, which saw flat growth year over year, better than the 3 percent to 5 percent decline Microsoft forecast.

IBM CEO: 'Everybody Believes Technology Is Now Essential To Helping Them Grow'

'How can you service customers better? How can you market better? How can you reach people more? How can you get things done in minutes instead of hours? So software is the basis for all of those capabilities. To a person, the budget that they will cut last if there is ever an issue is their software budget,' says IBM CEO Arvind Krishna. IBM's better-than-expected fourth fiscal quarter sent its stock soaring nearly 12 percent Wednesday to Friday and commentary from the cloud and mainframe giant's leadership shows positive signs for tech acquisitions, business spending and artificial intelligence. The Armonk, N.Y.-based vendor, which has thousands of partners in its ecosystem, forecasts 5-plus percent revenue growth year over year in 2025, with software growing double digits, Red Hat growing in the midteens, consulting growing in the low single digits and infrastructure and mainframes adding a point to revenue growth, IBM CFO Jim Kavanaugh said on the latest quarterly earnings call. Although IBM Chairman and CEO Arvind Krishna (pictured) didn't mention newly sworn in U.S. President Donald Trump or other world leaders, he said he anticipates "a regulatory environment that is a bit more rational and a bit more pro-competition." [RELATED: IBM CEO: GenAI With Consulting Driving Future Growth] IBM's $7 billion purchase of Terraform creator and cloud provider HashiCorp, unveiled in April and intended to close before 2025 started, has received scrutiny from the U.K.'s Competition and Markets Authority and Australian Competition and Consumer Commission. "We think reasonable deals have a very good chance of getting through in a reasonable amount of time and not being held up for years," Krishna said. "With that context, that means, obviously, we are going to lean in more." Speaking specifically about the nearly yearlong HashiCorp deal, Krishna said "we certainly hope that with a friendlier environment, that gets done soon, and that then begins to open up the aperture for getting more deals done." Kavanugh said that IBM is factoring HashiCorp revenue as part of its guidance. "We fully expect to close the Hashi transaction in a relatively soon period of time," the CFO said. He said HashiCorp should contribute about a point of revenue growth to IBM in 2025. CRN has reached out to IBM to see if the U.S. Department of Justice filing a lawsuit to prevent Hewlett Packard Enterprise's $14 billion acquisition of Juniper Networks has changed their executives' view of the regulatory environment. In a report Thursday, Melius Research predicted that the HashiCorp deal will close in the second quarter of 2025. Krishna said that he finds "more optimism in the business climate, and there is more optimism on the growth that is possible in '25 compared to '24" due in part to improving geopolitics and less "friction." He maintained his optimistic view on business technology spending, saying that "everybody believes technology is now essential for helping them grow." "How can you service customers better? How can you market better? How can you reach people more? How can you get things done in minutes instead of hours? So software is the basis for all of those capabilities," Krishna said. "To a person, the budget that they will cut last if there is ever an issue is their software budget. That is what is giving us confidence." Krishna echoed other sentiments from AI leaders about the apparent advancements China-based AI lab DeepSeek has brought to the emerging field. On the earnings call, Krishna brought to mind Microsoft Chairman and CEO Satya Nadella's "good news"observation on DeepSeek's potential breakthrough of a powerful AI model run locally and built with less capital than expected, with that breakthrough perhaps leading to easier adoption of AI. "DeepSeek, I think, was a point of validation," Krishna said. "We have been very vocal for about a year that smaller models and more reasonable training times are going to be essential for enterprise deployment of large language models." Krishna touted IBM's own work democratizing AI, seeing "as much as 30 times reduction in inference costs using these approaches." "As other people begin to follow that route, we think that this is incredibly good for our enterprise clients, and we will certainly take advantage of that in our business, but I believe that others will also follow that route," the CEO said. Kavanaugh said to expect the vendor still adds "a couple $100 million" to its capital expenditures as it invests in software, GenAI, next-generation mainframes and quantum computing. AI has captured the imagination and attention of the business technology world, but Kavanaugh pointed out that IBM's mainframe portfolio showed positive momentum in the quarter. Seventy percent of mainframe clients are growing capacity, measured in millions instructions per second (MIPS). "That is a very different profile than where we were 10 years ago," he said. "Installed MIPS are up 3X over the last few cycles." IBM runs workloads for 97 percent of the mission-critical transactional processing in banking, retail, airlines and other industries. IBM's transaction processing revenue grew 11 percent year over year ignoring foreign exchange. Kavanaugh attributed about 4 points of that growth to the capitalization of underlying workloads driving mainframe and 3 points to Watsonx Code Assistant for Z and GenAI monetization on the mainframe platform. IBM exeuctives said the generative AI book of business grew $2 billion quarter over quarter to $5 billion. Of wider importance to the channel, that spending came mostly in IBM Consulting, No. 6 on CRN's 2024 Solution Provider 500. Those bookings contributed to IBM saying to expect growth in consulting to accelerate from flat to mid single digits by the end of 2025, particularly in the second half of the year. Kavanaugh said consulting ended the fiscal year with the "highest recorded ever signings quarter, up 23 percent." He cautioned against too much excitement given that consulting is "still dealing with a very dynamic environment around clients prioritizing spend." Customers, like IBM itself, "are cutting back on discretionary-based spend so we can fuel investment into digital transformation and GenAI overall," Kavanaugh said. And winning customers' trust early in the AI race is important for the consulting business, he said. "We're so maniacally focused because enterprise clients are making their strategic provider of choice decisions," the CFO said. "That is going to be a long-term future vector of growth for consulting for us to win that has a multiplier effect that will drag our software component of our business going forward. So we feel pretty good."