Microsoft 1Q 2023: Moving All-in on Cloud-Based Manufacturing Software

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By James Iversen | 2Q 2023 | IN-6943

First quarter reports from Microsoft evidently show where the priorities lie within the company. Following extensive updates, a growing revenue stream, and increased demand, Microsoft Cloud has seen an uptick in revenue growth (16% Year-over-Year (YoY)) during 1Q 2023. Considering the continuous issues with the supply chain, COVID-19’s reemergence, and unprecedented inflation, Microsoft’s industrial cloud system, Azure, has been a beacon of light within the company.

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Growth of Azure in the First Quarter


Half of Microsoft’s 1Q 2023 product releases and enhancements were devoted to the updates of Azure. The other nine core Microsoft products—Windows, Gaming, Teams, 365, Dynamics, Power Platform, LinkedIn, Search, and Security—did not receive the same treatment. In comparison, these nine products accounted for US$30.8 billion in revenue for 1Q 2023. Microsoft’s Cloud revenue was US$22.1 billion in 1Q 2023, a YoY growth increase of 16%. Other hyperscalers in the industry, Alphabet (Google Cloud Platform (GCP)) and Amazon (Amazon Web Services (AWS)) reported US$7.4 billion (a 28% YoY increase) and US$21.35 billion (a 16% YoY increase) in cloud revenue for 1Q 2023, respectively. Much of Microsoft’s cloud growth for the first quarter was not driven by 365 or Dynamics, but by Azure and the updates made in the software, such as Change Analysis for data viewing and Azure Lab Services for Virtual Machine (VM) performance. Azure grew at 27%, dwarfing every other product offered by Microsoft by a significant degree.

Racing for the Best Solution and Market Lockdown


Microsoft Azure has seen growth in two complementary categories during 1Q 2023, leading to its increase in revenue. Enhanced applications and additional users are bolstering its bottom line. In 1Q, Azure received 35 updates, the most prominent being hierarchical Artificial Intelligence (AI) forecast modeling, serverless apps, and an increase of 45% in analytics processing for Central Processing Unit (CPU)-intensive operations. While a lot of big manufacturers have already signed on for an industrial cloud system, Microsoft has locked down big players in the industry. Microsoft, with Accenture, added manufacturing giant Unilever to its Azure platform in 1Q 2023, accelerating product launches and improving operational efficiency.

Although Azure has seen revenue growth of 27% (31% in constant currency) within the manufacturing cloud sector, but other hyperscalers, such as AWS and Google, have not taken a back seat. Amazon’s Industrial Data Fabric (IDF) and GCP for manufacturing have also seen good returns during 1Q 2023, with IDF chosen as the preferred provider for Southwest Airlines and GCP providing its cloud service to Sumitovant Biopharma. With this in mind, a critical race between the three to lock down large-scale strategic partners and customers is currently unfolding. The differentiating factor that will determine success comes down to the performance and functionality of their solutions, alongside partner and ecosystem development.

Competition, Risk, and Positioning for 1H 2023


Understanding the importance of the industrial cloud and how it can revolutionize the manufacturing sector is pivotal. Given the 1Q 2023 reports from Microsoft, customers comprehend the use cases and positive effects Azure has on manufacturing optimization and connectivity.

While Azure is the fastest growing product in Microsoft’s catalog, its C-suite comprehends the immense challenges ahead. Mentioned in its “Earnings Release FY23 Q3,” Microsoft highlighted the concerns regarding lower revenue and smaller operating margins needed to fight off AWS and Google. Fears of implementation and execution risks, along with uncertainties regarding acquisitions and strategic partnerships with cloud application vendors having adverse effects, were also highlighted in the Earnings Release.

In 2Q 2023, expect Microsoft to embed more data management and portability options for digital twin/thread implementation, double down on AI, and accelerate partner ecosystem development in key areas (connectivity, data management, and Operational Technology (OT) solutions). Already having key manufacturers, such as Intel, Mitsubishi and Bosch, the addition of Unilever using Azure for more streamlined manufacturing operations and product rollouts suggests the landgrab for big players in the market is far from over. For Microsoft and the other hyperscalers to exceed 1Q 2023 growth rates, they will need to prioritize customer needs and expand the manufacturing cloud market by bolstering the aforementioned solutions.