Earlier this year, ChatGPT ignited new interest in the world of artificial intelligence (AI). The chatbot, created by start-up OpenAI, nabbed the title of "fastest-growing consumer application in history," according to Reuters (citing a UBS study). The public fascination with ChatGPT initiated something of an AI-inspired gold rush -- particularly after it was revealed that Microsoft's (MSFT 1.07%) investment in OpenAI had jumped to $13 billion virtually overnight.
To be clear, Microsoft wasn't just jumping on the AI bandwagon. The company, which offers AI tools via its Azure cloud, stunned the tech world when it announced that it was integrating ChatGPT-like functionality into its Bing search engine. Its logic was sound: Microsoft estimates that for every 1% of worldwide search market share it can steal from Alphabet's Google, the company stands to gain a $2 billion revenue opportunity.
Microsoft released its quarterly results after the market close on Tuesday, and so far, Bing doesn't appear to be making (much) headway.
Image source: Getty Images.
The big picture
For Microsoft's fiscal 2023 third quarter (which ended March 31), the company generated revenue that grew 7% year over year to $52.9 billion. Ignoring the ever-changing fluctuations in exchange rates, revenue grew 10% in constant currency. Profitability was even more robust, as diluted earnings per share (EPS) of $2.45 increased 10%, or 14% in constant currency.
Wall Street sent up a collective cheer. Analysts' consensus estimates were calling for revenue of $51 billion and EPS of $2.24, so Microsoft cleared both bars with relative ease.
Two of Microsoft's three major segments delivered gains. Intelligent cloud was the headliner, with revenue that grew 19% in constant currency, driven by Azure Cloud, which grew 31%, well above expectations of 27% growth. The productivity and business segment did its parts as revenue jumped 15%.
The only laggard was more personal computing, as revenue for the segment declined by 9% (7% in constant currency). Given the one-two punch of high inflation and rising interest rates, consumer budgets are stretched to their limits, so this isn't at all surprising.
Is Bing making headway?
The latest version of Bing may be groundbreaking, but thus far, anyway, it doesn't appear to be moving the needle. Microsoft's search and news advertising revenue -- which is included in its more personal computing segment -- grew 10% year over year (excluding traffic acquisition costs), or 13% in constant currency. While it's good to see this moving in the right direction, the increase was consistent with the results Microsoft delivered last quarter.
On the Q2 conference call to discuss prior results, Microsoft executives were strangely silent on the topic, with CEO Satya Nadella saying only that "Bing continues to gain share in the U.S." Several media reports suggest that Bing got a lift in recent months since the integration with OpenAI. Traffic growth for Bing has outpaced that of Google so far in 2023, according to a report by Reuters, though it's from a much smaller base.
SimilarWeb came to a similar conclusion, showing that page visits to Bing increased 25% between February and March, while visits to Google increased 10%.
In 'search' of market share gains
In a recent post on LinkedIn, Jordi Ribas, Microsoft's head of search and AI, provided details about how the Bing upgrade came about. Inspired by the large-language model (LLM) that powered ChatGPT, Microsoft sought to reinvent the search experience and "explore how to integrate the GPT capabilities into the Bing search product," and "provide more accurate and complete search results for any query including long, complex, natural queries."
Seeing a world of possibilities, Microsoft developed Prometheus, a system that combines the power of Bing's search data with "OpenAI's most-advanced GPT models." The AI model also seeks to reduce inaccuracies using a technique dubbed "grounding." Prometheus ponders the information surfaced by Bing before generating an answer while simultaneously delivering pertinent Bing search responses.
By applying this new AI model to its Bing search ranking engine, Microsoft said it experienced "the largest jump in relevance in two decades."
So, what does this mean for Microsoft over the long term? In short, the jury is still out. There's little doubt the resulting buzz has driven interest in Bing's AI-powered search, but we'll have to watch to see if Microsoft can parlay that recent curiosity into long-lasting market share gains.
