Tech & Gadgets

Microsoft predicts slower growth for cloud companies in the second quarter

Microsoft forecast higher spending on artificial intelligence this quarter, but slower growth in its cloud business Azure, indicating that large AI investments were not enough to keep pace with capacity constraints in its data centers.

Shares of the Redmond, Washington-based company fell 3.6% in aftermarket trading, giving up earlier gains. The company exceeded Wall Street expectations for first-quarter revenue and profit.

Facebook owner Meta, which also reported results that beat analyst expectations, warned of a “significant acceleration” in AI-related infrastructure costs, sending its share price down 3.1% in aftermarket trading.

Brett Iversen, Microsoft’s vice president of investor relations, reiterated that Microsoft won’t be able to address AI capacity limitations until the second half of the fiscal year.

Microsoft forecasts second-quarter Azure revenue growth of 31% to 32%, falling short of the 32.25% growth that analysts expect on average, according to Visible Alpha. Azure revenue rose 33% in its first fiscal quarter ended September 30, slightly more than expected.

AI contributed 12 percentage points to Azure’s growth in the first quarter, compared to 11 percentage points in the previous three-month period.

Microsoft has invested billions in building its AI infrastructure and expanding its data center footprint. For the quarter, Microsoft said capital expenditures rose 5.3% to $20 billion, compared to $19 billion in the previous quarter. That was higher than Visible Alpha estimates of $19.23 billion.

The high spending has raised concerns among some investors.

The company is the worst performer among Big Tech names this year, with a gain of just over 15%, while Meta is up 68% and Amazon.com is up 28%.

According to estimates from analysts at Visible Alpha, Microsoft will spend more than $80 billion this fiscal year, which started in July. That is an increase of more than $30 billion compared to the last budget year.

“Microsoft is escalating a CapEx war that it may not be able to win. That level of investment is very high, it has created a very large drag on free cash flow and will create a very large drag on margins in the future,” said Gil Luria, head of technology research at DA Davidson.

Microsoft’s rival Google has benefited from the growth of AI. On Tuesday, Alphabet said AI contributed to a 35% increase in its cloud business. Shares closed up more than 2.8% on Wednesday and were down 0.4% after the market closed.

OpenAI Partnership

The quarterly results are Microsoft’s first since it restructured the way it reports its operations to better align them with the way they are managed. However, this move has made it more difficult to estimate the quarter’s performance.

Earnings per share were $3.30, compared to the average analyst estimate of $3.10, according to LSEG data.

Revenue rose 16% to $65.6 billion in the first fiscal quarter ended in September, compared with the average analyst estimate of $64.5 billion, LSEG said.

The company is seen as the leader among Big Tech peers in the AI ​​race thanks to its exclusive partnership with ChatGPT maker OpenAI. Microsoft’s Azure customers will have access to OpenAI’s latest models, such as the o1 models, which can answer challenging math, science, and coding problems.

Additionally, Microsoft is getting early access to integrate OpenAI’s technology into its product portfolio, such as in Bing and its enterprise applications like Excel and PowerPoint, but that effort has not gone as well as expected.

Outside of its cloud business, Microsoft reported revenues of $28.3 billion in its productivity business, which includes its Office application suite, 365 Copilot and its AI and voice technology services.

Microsoft’s personal computing unit, home to the Windows operating system and devices including Surface and gaming products including Xbox hardware, content and services, reported a 17% increase in revenue to $13.2 billion.

© Thomson Reuters 2024

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button