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Microsoft reported double-digit gains in quarterly revenue and profit driven by strong demand for cloud computing, but its shares slipped after it warned that growth was cooling and artificial intelligence-related spending would continue to rise.
The tech giant’s stock fell 3.8 per cent in after-hours trading on Wednesday, reversing initial gains, after executives flagged softening revenues at its key Azure Cloud division in the current fiscal quarter. Capital expenditures almost doubled to $20bn from the same period a year ago.
The outlook took some shine off of early optimism that the better than expected results indicated that chief executive Satya Nadella’s bet on AI was starting to pay off amid rapidly escalating spending on data centres needed to train and run powerful large language models and the apps built on top of them.
Revenue for its fiscal first quarter rose 16 per cent from a year ago to $65.6bn, beating analysts’ expectations for $64.5bn. Net income increased 11 per cent to $24.7bn in the three months to the end of September, exceeding the average estimate of $23.1bn.
The tech company has been in the vanguard of the adoption of AI, benefiting from widespread use of its Azure data centres and its partnership with market leader OpenAI, the maker of ChatGPT. Enthusiasm about the potential of the technology has propelled Microsoft to become the world’s third-most valuable public company, behind Apple and Nvidia.
However, investor doubts have emerged about the amount it is spending to fulfil those ambitions, building data centres around the world and filling them with specialised graphics processing units, servers and networking equipment.
Microsoft’s power demands are now so high that it struck a deal to revive the mothballed US nuclear plant at Three Mile Island as it seeks new low-carbon energy sources.
Nadella defended the amount of capex and the billions that Microsoft has invested in OpenAI in return for being its exclusive cloud provider and a 49 per cent of its for-profit subsidiary.
“The partnership for both sides has been super beneficial, we effectively sponsored the highest valued private companies today, we took a bet on them and their innovation five years ago and it has been a great success,” he said on a call with analysts. “We are in constant dialogue with them . . . push[ing] each other to do more and capture the moment.”
“I am thrilled with their success and their need for supply from Azure and our infrastructure,” added chief financial officer Amy Hood. “It is important that we continue to invest capital to meet their demand signals and need for compute.”
Microsoft disclosed publicly for the first time that it had invested $13bn in OpenAI — a figure that rose to $13.75bn in most recent fundraising — and gave its first indication of the big hit it has taken as a result.
Its loss from investments accounted for using the equity method — which includes its large minority stake in OpenAI — was $683mn for the quarter. Microsoft did not reveal how much of that was down to OpenAI, but the AI start-up’s annualised losses have been reported to be more than $5bn.
Executives predicted that capex would continue to rise alongside OpenAI and other customers’ demand for computing, which currently outstrips capacity.
While revenue from Azure and associated cloud computing services jumped 33 per cent from a year ago, Hood said this would slow slightly to between 31 per cent and 32 per cent in the second quarter, disappointing analysts.
Microsoft provided additional disclosure in an attempt to show AI is starting to be monetised. It said AI services accounted for 12 percentage points of Azure’s quarterly growth, which includes customers running their custom models through Microsoft’s data centres, paying for OpenAI’s services via the Azure platform and using GitHub Copilot, an AI coding assistant.
Nadella said AI products were now on track to contribute $10bn to annual revenue, which would make it the “fastest business in our history to reach this milestone”.
Microsoft is also building its own in-house enterprise and consumer AI products — known as Copilots and powered by ChatGPT models — under Mustafa Suleyman, who it poached from start-up Inflection. The company also invested $1.5bn in Abu Dhabi AI group G42 as part of an international expansion.
While Microsoft stock had increased 16 per cent year to date, other tech companies such as Meta and Amazon have risen more, at 68 per cent and 28 per cent, respectively. Shares in Alphabet, the parent of its rival Google, rose 2.9 per cent after it posted similarly strong growth in its cloud business on Tuesday, extending its rise this year to 26 per cent.
