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Microsoft’s Azure cloud computing service experienced slower growth in the latest quarter, raising concerns among investors who were hoping to see greater returns from the company’s substantial investments in artificial intelligence (AI). Azure’s revenue increased by 29% in the fiscal fourth quarter, down from 31% in the previous quarter. Around 8 percentage points of this growth came from AI, up from 7 points the previous quarter.
Doug Clinton, a managing partner at Deepwater Asset Management, commented that the cloud services figure fell short of expectations, despite the growing contribution from AI indicating solid progress in that area. Analyst Raimo Lenschow from Barclays also noted that the AI momentum was a positive sign for the business.
CEO Satya Nadella has been integrating AI technologies, including digital assistants known as Copilots, into Microsoft’s products. These AI tools, powered by OpenAI, can perform tasks like summarizing documents and generating code or emails. Microsoft is also offering Azure cloud subscriptions that include OpenAI products. Alongside competitors such as Amazon and Google, Microsoft has been heavily investing in new data centers to meet rising demand for cloud computing and AI services.
During a call with analysts, Chief Financial Officer Amy Hood acknowledged that Azure growth will continue to slow in the current quarter but expects growth to accelerate in the second half of fiscal 2025 due to ongoing investments in data centers and servers.
Following the announcement, Microsoft’s stock dropped about 4% in extended trading, after falling as much as 9.1% earlier in the day. The stock closed at $422.92, reflecting a 12% gain for 2024.
Capital expenditures for the quarter ending June 30 surged to $19 billion, up from $14 billion the previous quarter, as the company ramped up its AI infrastructure. These expenditures are expected to increase further in the new fiscal year. Brett Iversen, head of investor relations, mentioned that Microsoft currently doesn’t have enough capacity to meet customer demand for cloud and AI services, but the company is working to expand quickly.
Investors have shown some impatience with tech companies’ slow returns from AI investments. For instance, Alphabet’s shares fell last week after higher-than-expected costs overshadowed strong sales.
Microsoft’s new AI features, such as the Copilot service, are still in the early stages, and many corporate customers are just beginning to use them. These services, which double the cost of an Office 365 subscription to about $60 per user per month, are expected to generate significant recurring revenue in the future.
Iversen noted that more customers are opting for the higher-tier Office 365 product, which includes AI capabilities. Sales from commercial cloud products, including Azure and Office applications, rose 21% to $36.8 billion, in line with Wall Street expectations.
Overall, Microsoft reported a 15% increase in total revenue for the fourth quarter, reaching $64.7 billion, with adjusted earnings of $2.95 per share. These figures matched analysts’ predictions of $64.5 billion in revenue and $2.94 per share in earnings.
Nadella highlighted the rapid growth of Copilot usage, which doubled quarter-over-quarter. He also noted that Copilot’s use in GitHub, an AI-driven tool for software development, accounted for 40% of the revenue growth in that segment.
Microsoft’s Xbox division also posted significant gains, with content and services revenue growing by 61%, largely driven by the $69 billion acquisition of Activision Blizzard, which was finalized in October.
Just before releasing its financial results, Microsoft faced partial outages with its Azure and Office 365 services, affecting companies like Starbucks. Additionally, earlier this month, a software update from CrowdStrike led to crashes on around eight million Windows devices, raising concerns about the security of Microsoft’s operating system, although the issue was not directly caused by the company.
Nadella underscored the importance of cybersecurity during the earnings call, pointing out that Microsoft now has over 1.2 million security customers and that its Defender for Cloud security product generated over $1 billion in revenue in the past year. He emphasized that security remains a top priority for the company.
