Tuesday's quarterly revenue and profit figures for Microsoft beat market expectations, thanks in part to new AI features that encouraged customers to use its Azure cloud service while developing their own AI services.
However, as investors took in information about the growing expenses associated with developing these AI features, Microsoft's stock fell 1% after hours.
According to the company, operating expenses for the current quarter were expected to increase from $15.4 billion to $15.8 billion. Also, it said that it anticipates capital spending to increase materially over time.
Over the past year, Microsoft has integrated chatbots into its main products, including its Office suite and Bing search engine, in partnership with OpenAI, the creators of ChatGPT. This has drawn business clients who are eager to explore the latest innovation in the tech industry. Microsoft's stock increased by 57% in 2023 because of investor excitement surrounding AI.
However, this has also raised Microsoft's expenses, and investors are keeping a careful eye on the company's development in its Office and Azure businesses to see if it can keep up with the enormous expenditures it intends to make this year in data centers to supply generative AI.
CEO Satya Nadella stated that they have moved from chatting about AI to using AI at scale, and by integrating AI into every level of their technology stack, they are gaining new clients, promoting new advantages, and increasing productivity in every sector.
Vice president of investor relations at Microsoft, Brett Iversen, said that AI accounted for six percentage points of Azure's growth rate in the second quarter. That is equivalent to twice the first quarter's 3 percentage points.
At a conference call with investors, Nadella said that of the 53,000 Azure AI users, a third had not used the service before in the previous year.
He stated that overall, they are seeing bigger and more strategic Azure deals with a rise in the amount of billion dollars in addition to Azure commitments.
The average analyst forecast for the quarter ending December 31 was $61.12 billion. LSEG data shows that total sales increased by 18% to $62 billion. The adjusted profit of $2.93 per share exceeded the consensus forecast of $2.78.
Microsoft's Intelligent Cloud division, which houses the Azure cloud computing platform, saw a 20% increase in revenue to $25.9 billion. Sales of Azure increased by 30%, which is its highest growth rate in the last four quarters, surpassing a 25.7% increase in Google Cloud and a Visible Alpha consensus expectation of 27.7%.
With the completion of its $69 billion acquisition of Activision Blizzard, the publisher of "Call of Duty," Microsoft's More Personal Computing sector saw a 19% increase in sales to $16.9 billion. This sector involves its Windows operating system as well as gaming business. Analysts had predicted $16.8 billion.
Microsoft's Productivity and Business Process sector, which also includes the LinkedIn social network along with Office, announced that sales increased 13%, reaching $19.2 billion, just exceeding estimates.
Late on Tuesday, AI-related companies saw a $190 billion decline in market value after Microsoft, Alphabet, and Advanced Micro Devices released quarterly results that did not meet the expectations of investors, who had previously driven their prices higher.
Surge powered by AI
Analysts have warned that the company's drive into AI and its strategic alliance with Silicon Valley startup OpenAI may not yield significant returns until next year, but investors have applauded these efforts.
Microsoft began offering Copilot, an AI assistant, for $30 a month in November. Analysts claim this is a premium price for an AI helper that can create a slide show or summarize an email inbox.
Visible Alpha data reveals that early product sales showed up in the company's commercial Office software sales, where revenue increased by 17% against analyst projections of 14.2%.
On Tuesday, Microsoft's Iversen announced that 400 million paid seats, up from 382 million in April 2023, are currently available for purchase through Office's commercial offers, which include the Copilot product.
With a $300 million increase from the quarter prior, the firm's capital expenditures now total $11.5 billion, on track to exceed $46 billion in the current fiscal year.
That, according to Iversen, is an indication of the level of consumer demand.
The last few trading sessions have seen Microsoft overtake Apple as the most valuable listed business in the world thanks to its stock surge. That was indented by a power dispute within OpenAI that revealed the software giant's failure to exert direct control over its significant partner. Microsoft also has to deal with some regulatory and legal challenges