(Bloomberg) — Shares of Microsoft Corp. were trading late after the software maker forecast slower quarterly cloud revenue growth, reflecting the company's struggle to bring data centers online quickly to keep up with demand for artificial intelligence services.
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Sales of the closely watched Azure cloud-computing business will grow 31% to 32% in the current period, Microsoft executives said on a call after its first-quarter earnings report on Wednesday. Azure revenue posted a 34% gain for the period, adjusted for currency fluctuations, down slightly from 35% growth a quarter earlier.
Dow's outlook followed an otherwise upbeat report, during which the company said first-quarter revenue rose 16% to $65.6 billion and profit rose to $3.30 a share — beating estimates.
But in a call with analysts, Chief Financial Officer Amy Hood said some of the data center capacity Microsoft is counting on for its push into artificial intelligence hasn't materialized. This will limit revenue growth in the Azure business in the current quarter ending in December.
“We're in short supply, and so we're focused on getting it to a more balanced position,” Hood said in an interview.
Microsoft shares reversed earlier gains and fell about 4% in extended trading.
“Our fear is that the more they put into data center buildout, the more it will drag on margins,” said Gil Luria, an analyst at DA Davidson & Co., who cut his rating on Microsoft shares to “neutral.” September marginal. “It's not happening yet. They still managed to cut costs elsewhere enough to expand margins.”
CEO Satya Nadella overhauled the software maker's product line with AI models from partner OpenAI. He's now looking to recruit enough paying customers to souped-up software and services to drive Microsoft's growth for years to come. At the same time, corporations are tapping the company's data-center capabilities to develop their own AI applications, driving demand for its closely watched Azure business.
Cloud rivals Google and Amazon.com Inc. As such, Microsoft has ramped up spending to build and rent the data centers needed to fuel power-hungry AI services. Microsoft even recently struck a deal to buy nuclear power from a restart reactor at Three Mile Island to ensure it has enough electricity to meet growing demand.
Quarterly capital spending in the first quarter, $14.9 billion, was a record, up 50% from the same period a year ago and beating analysts' expectations. Prior to 2020, Microsoft had never spent so much on property and equipment in an entire year.
In the second quarter, Microsoft's line item “other income and expenses,” where it accounts for investments, will show a loss of about $1.5 billion, largely due to Microsoft's share of expected losses from OpenAI, CFO Hood Call predicted. Microsoft, which has put about $13.75 billion into the ChatGPT maker, is OpenAI's largest shareholder.
Investors have been watching for signs that Microsoft's massive investment in AI is paying off, and the stock fell 3.7% in the September quarter, compared with a 5.5% gain in the S&P 500 index. The decline has Wall Street worried that the company has yet to realize sufficient returns from its AI investments, and risks falling behind as rivals pile into the market. Azure forecasts on Wednesday revived those concerns, even as the company reported strong AI-related revenue gains and expressed optimism about further momentum for AI products.
Microsoft's main sources of AI-related revenue fall into two categories — cloud services and AI-enhanced productivity assistants baked into Office, which help workers summarize emails, transcribe conference calls and create slideshows. AI accounted for 12 percentage points of Azure's first-quarter growth, compared with 11 points in the June quarter, the company said.
The company expects its AI business to bring in more than $10 billion in sales in the next quarter, Nadella said on the call.
Microsoft's overall cloud revenue, a mix of sales of products such as Office and Azure cloud sales, rose 22% in the most recent period to $38.9 billion.
Microsoft continues to sign up corporate clients to use its AI-infused Office services, which carry a monthly list price of $30 per user in addition to the cost of the basic Office product. Because of that cost, and because the products are still in the early stages of preparation, some clients have moved slowly with testing and deployment.
Still, the price hike is starting to benefit Microsoft. Average revenue per user is increasing, Hood said in the interview, due to both AI offerings and a higher-priced version of the Office suite called E5.
Search advertising revenue also grew a better-than-expected 19% excluding currency effects, Hood said. Microsoft is baking AI into its Bing search service, and those improvements have increased both user volume and the price advertisers are willing to pay, he said.
The results came a day after Alphabet Inc.'s Google posted quarterly cloud sales that topped analysts' estimates, to $11.4 billion, a 35% increase from the year-earlier period. Amazon, the largest cloud provider, is scheduled to report earnings on Thursday.
— with assistance from Vlad Savov.
(Updates with analyst comments, forecast from the call beginning in the fifth paragraph.)
