Microsoft profit jumps 10%, but cloud computing grows less than expected

By Karen Weise

Microsoft closed its first full fiscal year of aggressive artificial intelligence investment with a mixed bag of results for people worried about how much big tech companies are spending on AI.

Sales from April through June hit $64.7 billion, up 15% from the same period last year, the company reported earlier this week. Profit rose 10%, to $22 billion.

The results beat Wall Street’s expectations and Microsoft’s own predictions. But the company’s cloud computing business did not grow as quickly as investors had expected, leading its share price to drop more than 6% in after-hours trading.

Azure, Microsoft’s flagship cloud computing product that includes AI services, grew 30% in the quarter after taking into account currency fluctuations. Investors had been hoping it would grow between 30% and 31%, as Microsoft had told them to expect.

On a call with investors, Satya Nadella, the company’s CEO, and Amy Hood, the finance chief, said that Microsoft could have sold more if they’d had enough data center capacity — and that those constraints would last through the end of 2024. They added that the AI investments are attracting new customers to Microsoft’s cloud business.

“These are generational things once they get going with you,” Nadella said.

The earnings report showed how the company is spending mightily to build the data centers and acquire the pricey chips that power AI technology. Microsoft’s capital expenses have grown every quarter since late 2022, when Nadella pushed his top executives to make big investments in AI Microsoft spent almost $19 billion on capital expenses last quarter, more than twice as much as two years earlier.

Investors have turned their attention to Microsoft’s spending after Alphabet, Google’s parent company, reported slowing growth and a 91% increase in capital expenses, prompting a sell-off in technology stocks last week.

Markets have generally given Microsoft more leeway to spend than other companies, said Rishi Jaluria, an analyst at RBC Capital Markets, an investment bank. That’s because Microsoft has disclosed some details of its AI sales, and has said that it could have sold even more if it had more computing capacity, he said.

“There is an AI halo effect that happens to the rest of Microsoft’s businesses,” Jaluria said.

Microsoft told investors to expect its operating profit to be slightly lower in the next fiscal year, which runs from July through June 2025, and that its capital expenditures would continue growing as it invested more in AI.

The company has a strong position in the technology through its $13 billion investment in OpenAI, the startup behind ChatGPT. Microsoft sells access to OpenAI’s systems to its own customers, and it also earns a cut of sales that OpenAI makes directly to customers, because OpenAI uses Microsoft’s cloud computing infrastructure.

In the latest quarter, artificial intelligence accounted for 8 percentage points of the company’s cloud computing growth, more than last quarter. That indicated that growth of the non-AI parts of the cloud business slowed slightly. “As soon as we get capacity available to sell, we are selling it,” Brett Iversen, Microsoft’s head of investor relations, said in an interview.

On the investor call, Hood said there was also some weakness in June in cloud demand in some European markets.

The New York Times has sued OpenAI and Microsoft, claiming copyright infringement of news content related to AI systems. The two companies have denied the suit’s claims.

Commercial sales of Microsoft’s productivity software, including Excel and Teams, grew 12%. That includes a little of the new AI features the company has been infusing into the software, which customers have begun trying out.

Nadella said many customers are expanding their pilot programs to give more employees access to the AI tools.

Video games, Microsoft’s increasingly important consumer business, grew from $3.5 billion to $5 billion in revenue, driven by its $69 billion acquisition of game publisher Activision Blizzard that closed last year.

Other parts of its personal computing business had more modest growth. Revenue from Windows software that was preinstalled on new personal computers was up 4%, less than the previous quarter, as it stabilizes coming out of the pandemic’s volatile mix of demand for new personal computers and supply chain shortages.