Microsoft Cloud revenue soars on AI boom but soft outlook weighs on shares

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Microsoft reported double-digit gains in quarterly revenue and profit, driven by strong demand for cloud computing, but its shares fell after it warned growth was cooling and artificial intelligence-related costs would continue to rise.

The tech giant's stock fell 3.8 percent in after-hours trading on Wednesday, reversing early gains, after executives flagged soft revenue in its Azure cloud division in the current fiscal quarter. Capital spending nearly doubled to $20 billion from the same period a year ago.

The outlook tempers early optimism that the better-than-expected results indicate that Chief Executive Satya Nadella's bet on AI is starting to pay off, as data centers need to be spent on training and running powerful large-scale language models and the apps built on them.

Revenue in its fiscal first quarter rose 16 percent from a year earlier to $65.6 billion, beating analysts' expectations of $64.5 billion. Net income rose 11 percent to $24.7 billion in the three months ended September, beating the average estimate of $23.1 billion.

The tech company has been at the forefront of AI adoption, benefiting from its extensive use of Azure data centers and a partnership with OpenAI, maker of ChatGPT.

Enthusiasm about the technology's potential has made Microsoft the world's third-most valuable public company, behind Apple and Nvidia.

However, investors have been skeptical about the cost of building data centers around the world and filling them with specialized graphics processing units, servers and networking equipment to meet these ambitions.

Microsoft's demand for power is now so high that it has struck a deal to revive the mothballed US nuclear plant at Three Mile Island as it looks for new low-carbon energy sources.

Nadella has protected the amount of capex and billions that Microsoft has invested in OpenAI in exchange for its exclusive cloud provider and 49 percent of its subsidiary for profits.

“The partnership has been very beneficial for both parties, we have effectively sponsored the highest valued private companies today, we bet on them and their innovation five years ago and it has been a great success,” he said in a call with analysts. “We are in constant dialogue with them. . . push[ing] To make each other do more and capture the moment.

“I'm thrilled with their success and their need to deliver from Azure and our infrastructure,” added Chief Financial Officer Amy Hood. “It's important that we continue to invest capital to meet their demanding signaling and computing needs.”

Microsoft has publicly revealed for the first time that it has invested $13bn in OpenAI – a figure that rose to $13.75bn in its most recent fundraising – and gave the first indication of the big hit it has taken as a result.

Its loss from investments attributable to using the equity method – which includes a large minority stake in OpenAI – was $683mn for the quarter. Microsoft didn't disclose how much OpenAI was down, but the AI ​​start-up's annual losses are said to be more than $5 billion.

Executives predict that capex will continue to grow alongside the computing needs of OpenAI and other customers, which currently outstrip capacity.

While revenue from Azure and related cloud computing services rose 33 percent from a year ago, Hood said it would slow slightly to 31 percent to 32 percent in the second quarter, disappointing analysts.

Microsoft has provided additional disclosures in an effort to begin monetizing AI. It said AI services accounted for 12 percentage points of Azure's quarterly growth, including customers running their custom models through Microsoft's data centers, paying for OpenAI's services through the Azure platform and using AI coding assistant GitHub Copilot.

Nadella said AI products are now on track to contribute $10 billion in annual revenue, which would make it “the fastest business in our history to reach this milestone.”

Microsoft is building its own in-house enterprise and consumer AI products — called Copilot and powered by the ChatGPT model — under Mustafa Suleiman, who poached it from the start-up Inflection. The company has invested $1.5 billion in Abu Dhabi AI group G42 as part of its international expansion.

While Microsoft's stock is up 16 percent year over year, other tech companies like Meta and Amazon are up 68 percent and 28 percent, respectively.

Shares of rival Google's parent Alphabet rose 2.9 percent on Tuesday, extending this year's gain to 26 percent, after posting similarly strong growth in its cloud business.