Google parent company Alphabet and Microsoft, on their earnings calls Tuesday, gave insights into the fierce battle they are planning against one another on artificial intelligence in the coming years.

Alphabet beat market expectations in the first quarter of 2023 with a net profit of $15 billion, the company said Tuesday, in a sign that the search engine behemoth is regaining its footing.

The tech titan has found itself under pressure due to a general slowdown in advertising spending, over-hiring during a COVID-era boom and a major challenge by Microsoft on artificial intelligence.

Its quarterly revenue came in at nearly $70 billion, a billion better than expected by analysts, and in the same three-month period that the company said it would lay off 12,000 staff, or six percent of its workforce.

Microsoft's results for the first three months of the year also pleased investors Tuesday, lifted by its industry-leading business cloud products.

The company founded by Bill Gates reported profit of $18.3 billion on revenue of $52.9 billion as Cloud and AI more than offset drops in revenue from licensing Windows software to computer makers, as sales suffer in that market.

Most market attention was on Google, which became a focus of worry when Microsoft-backed ChatGPT was released and quickly went viral late last year. The Windows maker has added the technology to its Bing search engine and office software.

The search giant has since rushed out Bard, its own version of the language-based AI, but the release was seen as clumsy and has so far disappointed observers and company insiders, according to media reports.

"We'll continue to incorporate generative AI advances to make search better in a thoughtful and deliberate way," Google chief Sundar Pichai said during an earnings call.

"And we will test and iterate as we go because we know that billions of people trust Google to provide the right information."

Costly AI Arms Race

An arms race over AI is expected to play out for several years and could prove to be expensive for the tech giants.

To get itself battle ready for the AI wars ahead, Google has reorganized its AI division, putting the independently run Deep Mind subsidiary inside the company in a division called Google Brain.

The threat from an AI-augmented Bing sent Pichai on a rare US media tour recently to reassure that the company remained an industry leader on everything from search to maps to AI pioneering.

Despite headwinds, Pichai received a total compensation package worth more than $225 million in 2022, according to a regulatory filing posted last week.

Google-owned YouTube's advertising revenue dropped for the third quarter in a row. However, there was "strong watchtime growth" at a YouTube Shorts section added to counter TikTok .

During the quarter, YouTube chief Susan Wojcicki stepped down after nine years, replaced by longtime executive Neal Mohan.

'Serious Challenges'

"Google exceeded both revenue and earnings expectations this quarter, but reasons for investor optimism are modest," said Insider Intelligence senior analyst Max Willens. "Google's core business is facing the most serious challenges it has encountered in quite some time."

Despite challenges, Alphabet’s share price has recovered well from lows seen before January's layoff announcements and on Tuesday shot up by more than 4 percent in after-hours trading to $108.4.

This was still well shy of the near $150 seen in 2021, when ad revenue was pouring in.

Microsoft has been steadily pressing on with its AI revolution, recently announcing that it would apply the powers behind ChatGPT to its iconic Excel, Word and Outlook programs.

The Redmond, Washington giant has been swiftly adopting language-based AI, showing less caution than its rivals despite early problems such as chatbots giving disturbing responses or blatantly inaccurate information.

"We see that when people use the new AI features, their engagement with Bing and Edge goes up," Microsoft chief Satya Nadella said during an earnings call.

"We look forward to continuing this journey in what is a generational shift in the largest software category: search," Nadella said.