Microsoft Corp. reported a deceleration in quarterly growth for its Azure cloud-computing service, causing disappointment among investors eager to observe returns from substantial investments into artificial intelligence initiatives. For the fiscal fourth quarter, Azure revenue increased by 29 percent, a decline from a 31 percent increase in the preceding quarter. Approximately 8 percentage points of this growth was linked to AI, an uptick from 7 percentage points in the earlier period.
Doug Clinton, managing partner at Deepwater Asset Management, highlighted on Bloomberg Television that the cloud services figures had to be slightly higher to meet expectations. However, Raimo Lenschow, an analyst at Barclays, noted the increased contribution from AI as a confirmation of ongoing business momentum within this burgeoning sector.
CEO Satya Nadella has been actively incorporating AI technology into Microsoft’s offerings, powered by its partnership with OpenAI. This includes digital assistants, known as Copilots, capable of summarizing documents and generating various types of content like computer code and emails. The company is also marketing Azure cloud subscriptions that feature OpenAI’s products. Like competitors Amazon.com Inc. and Google, Microsoft is investing heavily to build new data centers to support the rising demand for cloud computing and AI services.
During a call with analysts, Chief Financial Officer Amy Hood indicated that while Azure’s growth might continue to slow in the current quarter ending in September, investments in data centers and servers are expected to enable the company to meet demand and enhance Azure growth in the latter part of fiscal 2025.
Microsoft’s shares dipped around 4 percent in after-hours trading, recovering from earlier declines that reached 9.1 percent. The stock closed at $422.92, reflecting a 12 percent increase for the year 2024.
In the fourth quarter ending June 30, the company’s capital expenditures soared to $19 billion, compared to $14 billion in the previous quarter. This increase, highlighted by investors as the company pushes forward with its historic AI expansion, is projected to rise further in the new fiscal year, according to Hood.
Brett Iversen, head of investor relations, acknowledged that Microsoft does not currently have the capacity to meet the demand for its cloud and AI services. “We’re building out for that as quickly as we can,” he remarked.
Investor sentiment has turned cautious recently, as many are growing impatient with the tech sector’s ability to generate profit from extensive AI investments. The situation was reflected last week when shares of Alphabet Inc., Google’s parent company, plummeted after the firm reported unexpectedly high costs that overshadowed strong sales figures.
Many of Microsoft’s enterprise clients are only beginning to implement the new AI assistants, which still struggle with certain contextual requests and multi-app commands. The Copilot service, which nearly doubles the monthly subscription costs to about $60 for corporations, is anticipated to yield significant recurring revenue in the long term.
Iversen noted that there is an increasing trend toward the adoption of Microsoft’s higher-tier Office 365 product, which features generative AI capabilities. Revenue from commercial cloud products, which includes Azure and Office applications, climbed 21 percent to $36.8 billion, aligning closely with Wall Street expectations.
Overall revenue for the fourth quarter was reported at $64.7 billion, marking a 15 percent increase, while adjusted earnings per share stood at $2.95. Analysts had projected sales of $64.5 billion and earnings of $2.94 per share.
During the analyst call, Nadella mentioned that the number of users engaging with Copilot at work doubled from the previous quarter. Moreover, Copilot’s integration within GitHub, which aids software development with AI assistance, accounted for 40 percent of revenue growth in that business segment.
The Xbox gaming division experienced a remarkable 61 percent increase in revenue from content and services, largely due to the $69 billion acquisition of Activision Blizzard, completed last October.
Shortly before announcing its financial performance, Microsoft faced partial outages of its Azure and Office 365 services, which also affected clients like Starbucks Corp.
In an unrelated incident earlier, around eight million computers operating on Microsoft’s Windows platform encountered crashes following a problematic software update released by CrowdStrike Holdings Inc. Although the software failure stemmed from an external source, concerns lingered regarding Microsoft’s potential vulnerabilities, as noted by Tyler Radke, an analyst at Citigroup.
Nadella addressed progress in the company’s cybersecurity offerings during the call with investors, declaring the presence of over 1.2 million security customers. He highlighted that Defender for Cloud, a cybersecurity product, surpassed $1 billion in revenue in the past year. “We continue to prioritize security above all else,” Nadella stated.
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