Business leaders are unwinding their cost-saving cloud optimization efforts and preparing to pump significant new investments into cloud migrations along with breakthrough deployments of data applications and artificial intelligence (AI) applications, Microsoft CEO Satya Nadella said.
Fresh on the heels of Microsoft’s booming Q4 financial results, in which cloud revenue rose 21% to $30.3 billion, Nadella said spending on forward-looking business initiatives powered by the cloud will increase as companies prepare for the next wave of technology-driven 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 increase significantly throughout Microsoft’s FY24 (July 1 to June 30) to ensure it has the data center capacity to keep pace with the expected jump in demand.
The return by customers of significant cloud spending and the unwinding of what has been an extended “cloud optimization phase” follows an abnormal 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 see new project starts, and then those project starts get optimized,” Nadella said.
“And then it’s like a time series of everything, and that’s pretty much what you see in the normal course.
“But what happened here was during the pandemic, there were a lot of new projects that started and optimization was somehow delayed. And that’s where you’ve seen what I would call ‘catch-up optimization’ .”
Those catch-up efforts have met their goals, Nadella said, paving the way for a fresh round of new investment.
“That catch-up optimization is something that we’re going to lapse into in the next couple of quarters — I think it’s going to drop — and we’re seeing new projects starting, including traditional types of project startups, but also even cloud migrations, data applications and of course the AI applications,” Nadella said.
So although cloud optimization as a whole certainly is does not disappear and will instead remain a staple of large-scale cloud deployments, the long-standing cost-limiting effects of “catch-up optimizations” are coming to an end.
“So we will return to what I would 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 stressed that beyond the return from the optimization phase, the other massive market dynamic shaping his bullish outlook is that only a small fraction of IT deployments have actually moved to the cloud. As Nadella put it, “There’s still a lot there.”
In addition, there is the enormous potential of the generative AI revolution, the economic consequences of which are only beginning to be felt.
“As I think about it, we’re still only in inning two or inning three of even the cloud migration, especially if you look at industry moves to the cloud, segment moves to the cloud, as well as country adoption of the cloud,” he said.
“This is still the early start of the cloud migration itself – there’s still a lot there. And then on top of that, there’s this whole new world of AI that’s driving a variety of new workloads.
“And then we think that again it’s quite expansive from a TAM [Total Addressable Market] opportunity and we will play it out.”
“Play it out” indeed. And the guiding approach in that game for Nadella and Microsoft will undoubtedly be simple: all in.
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