Xbox grows 61 percent thanks to Activision-Blizzard acquisition
Microsoft Corp.’s Azure cloud computing service posted a slowdown in quarterly growth, disappointing investors eager to see a payoff from massive investments in artificial intelligence products. Revenue from Azure, Microsoft’s main growth engine in recent years, rose 29 percent in the fiscal fourth quarter, compared with a 31 percent jump in the prior period. About 8 percentage points of the increase in the recent period was attributable to AI, up from seven percentage points in the previous quarter.
“It was really about the number of cloud services — it just had to be a little bit higher,” Doug Clinton, a managing partner at Deepwater Asset Management, said on Bloomberg Television. Still, the accelerating contribution of AI underscores the business momentum with the emerging technology, wrote Raimo Lenschow, an analyst at Barclays.
Chief Executive Officer Satya Nadella has bolstered Microsoft’s product line with AI technology from partner OpenAI, including digital assistants called Copilots that can summarize documents and generate computer code, emails and other content. The company also sells Azure cloud subscriptions that feature OpenAI products. Alongside rivals Amazon.com Inc. and Google, Microsoft has spent billions building new data centers to meet demand for cloud computing and power-hungry AI services.
On a call with analysts on Tuesday, CFO Amy Hood said that while Azure’s growth will continue to slow in the current quarter ending in September, the company can capitalize on demand and accelerate Azure’s growth in the second half of fiscal 2025 thanks to investments in data centers and servers.
Shares of Microsoft fell about 4 percent in extended trading, paring earlier losses of as much as 9.1 percent. The stock closed at $422.92 (about Rs. 34,415) in New York, for a 12 percent gain in 2024.
In the fourth quarter ended June 30, capital expenditures — closely watched by investors as the company begins its historic AI buildout — rose to $19 billion (roughly Rs. 1,59,091 crore), including server farm leases, from $14 billion (roughly Rs. 1,17,225 crore) in the previous quarter. That number will increase in the new fiscal year, Hood said.
In an interview, Brett Iversen, chief investor relations, said Microsoft doesn’t currently have enough capacity to meet customer demand for cloud and AI services. “We’re building that as quickly as we can,” he said.
In recent weeks, nervous investors have expressed impatience with tech companies’ attempts to profit from their massive investments in AI. Last week, shares of Google parent Alphabet Inc. fell after the company surprised Wall Street with sharply higher costs that overshadowed strong sales.
Many of Microsoft’s enterprise customers are just starting to adopt new AI assistants, which still struggle to understand the context of some requests and handle commands across multiple apps. The Copilot service, which doubles the cost of a monthly subscription to about $60 (roughly Rs. 5,023) per user for businesses, is expected to eventually generate a robust stream of recurring revenue.
Iversen said customers are increasingly embracing the company’s higher-end Office 365 product, which includes generative AI features. Sales of commercial cloud products, including Azure and Office Applications, rose 21 percent to $36.8 billion (about Rs. 3,08,168 crore), Microsoft said, roughly in line with Wall Street estimates.
Total revenue in the fourth quarter rose 15 percent to $64.7 billion (approximately Rs. 5,41,807 crore) while adjusted earnings came in at $2.95 (approximately Rs. 250) per share, the company said in a statement on Tuesday. Analysts on average were estimating revenue at $64.5 billion (approximately Rs. 5,40,100 crore) and earnings per share at $2.94 (approximately Rs. 246)
During the call, Nadella said the number of people using Copilot at work has doubled quarter over quarter. Copilot usage within GitHub, which enables AI assistance in software development, accounts for 40 percent of revenue growth in that business, he added.
The company’s Xbox video game division posted 61 percent growth in content and services revenue, much of which was driven by the company’s $69 billion (approximately Rs 5,77,781 crore) acquisition of Activision Blizzard, which closed in October.
Hours before the company’s financial results were announced, Microsoft’s Azure and Office 365 services suffered partial outages, shutting down services for customers including Starbucks Corp.
Just a few weeks earlier, some eight million computers running Microsoft’s Windows operating system crashed after cybersecurity firm CrowdStrike Holdings Inc. released a flawed software update. While the outage was caused by CrowdStrike, “Microsoft may still have to deal with negative perceptions surrounding perceived vulnerabilities in its operating system,” Citigroup analyst Tyler Radke wrote ahead of earnings.
Nadella touted the advancements in the company’s cybersecurity products during the call with investors. The company said it has more than 1.2 million security customers and that Defender for Cloud, a security product, generated more than $1 billion (about Rs. 8,374 crore) in revenue last year. “We continue to put security above all else,” Nadella said.
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