Quarterly growth for Microsoft Corp’s Azure cloud computing service slowed, disappointing investors eager to see returns on huge investments in artificial intelligence products. Revenue from Azure, Microsoft’s main growth engine in recent years, grew 29% in the fiscal fourth quarter, compared with 31% growth in the previous quarter. About 8 percentage points of recent growth was attributed to artificial intelligence, up from 7 percentage points in the previous quarter.
“It’s really about cloud service volumes – they just need to be a little higher,” Doug Clinton, managing partner at Deepwater Asset Management, said on Bloomberg TV. Still, the accelerating contribution of artificial intelligence confirms the business momentum for this emerging technology, Barclays analyst Raimo Lenschow wrote.
Chief Executive Officer Satya Nadella has been infusing Microsoft’s product lines with artificial intelligence technology from partner OpenAI, including digital assistants called Copilots that can aggregate documents and generate computer code, emails and other content. The company also sells Azure cloud subscriptions using OpenAI products. Along with rivals such as Amazon and Google, Microsoft has been spending billions of dollars building new data centers to meet demand for cloud computing and power-hungry artificial intelligence services.
Chief Financial Officer Amy Hood said on a conference call with analysts on Tuesday that while Azure growth will continue to slow in the quarter ending in September, investments in data centers and servers will allow the company to take advantage of demand and accelerate Azure growth in the second half of fiscal 2025.
Microsoft shares fell about 4% in after-hours trading, down from an earlier decline of 9.1%. The stock closed at $422.92 (roughly Rs. 34,415) in New York, up 12% in 2024.
Capital expenditures, which are closely watched by investors as the company embarks on a historic artificial intelligence buildout, jumped to $19 billion (roughly Rs. 1,59,091 crore) in the fourth quarter ended June 30 from $14 billion (roughly Rs. 1,17,225 crore) in the previous quarter, which includes server farm leasing. That number will increase in the new fiscal year, Hood said.
Brett Iversen, director of investor relations, said in an interview that Microsoft currently lacks sufficient capabilities to meet customer demand for cloud and artificial intelligence services. “We are preparing for this as quickly as possible,” he said.
In recent weeks, uneasy investors have expressed impatience with technology companies’ efforts to profit from massive investments in artificial intelligence. Shares of Google parent Alphabet Inc. fell last week after a sharp rise in costs overshadowed strong sales, surprising Wall Street.
Many of Microsoft’s enterprise customers are just starting to use the new AI assistant, which still struggles to understand the context of some requests and process commands that span multiple apps. The Copilot service doubles the monthly subscription cost per user for enterprises to about $60 (roughly Rs. 5,023) and is expected to eventually generate a strong recurring revenue stream.
Iversen said customers are increasingly adopting the company’s high-end Office 365 products, which include generative AI capabilities. Microsoft said sales of commercial cloud products, including Azure and office applications, rose 21% to $36.8 billion (approximately Rs. 3,08,168 crore), broadly in line with Wall Street expectations.
The company said in a statement on Tuesday that total revenue in the fourth quarter rose 15% to $64.7 billion (approximately Rs 5,41,807 crore) and adjusted profit was $2.95 per share (approximately Rs 250). Analysts on average estimated sales of $64.5 billion (approximately Rs. 5,401 billion) and earnings per share of $2.94 (approximately Rs. 246)
Nadella said on the conference call that the number of people using Copilot at work has doubled from the previous quarter. He added that the use of Copilot in GitHub to provide artificial intelligence assistance in software development accounted for 40% of the business’s revenue growth.
The company’s Xbox video games division saw content and services revenue rise 61%, mostly driven by the $69 billion (roughly Rs. 57,778.1 crore) acquisition of Activision Blizzard, which was completed in October.
Microsoft’s Azure and Office 365 services experienced partial outages hours before the financial results were announced, disrupting services for customers including Starbucks.
Just weeks ago, about 8 million computers running Microsoft’s Windows operating system crashed after cybersecurity firm CrowdStrike Holdings Inc. released a flawed software update. Citigroup analyst Tyler Radke wrote ahead of the earnings release that although the outage was caused by CrowdStrike, “Microsoft may still need to deal with negative perceptions that its operating system has vulnerabilities.”
Nadella touted progress in the company’s cybersecurity products during a conference call with investors. The company said it has more than 1.2 million security customers and its security product Defender for Cloud generated revenue of more than $1 billion (approximately Rs. 8,374 crore) in the past year. “We continue to put safety first,” Nadella said.
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