(Bloomberg) -- Microsoft Corp.’s Azure cloud service posted a slowdown in quarterly growth, disappointing investors anxious to see a payoff from huge investments in artificial intelligence products. The shares fell.
The company’s total revenue in the fourth quarter, which ended June 30, increased 15% to US$64.7 billion, while adjusted profit was $2.95 a share, the company said in a statement Tuesday. Analysts on average estimated sales of $64.5 billion and per-share earnings of $2.94.
But the Azure cloud-computing service, Microsoft’s main growth engine in recent years, posted a 29% revenue gain in the quarter, decelerating from the 31% growth in the previous period. About 8 percentage points of that increase was attributable to AI, up from 7 percentage points in the prior quarter.
Microsoft shares fell about 6% in extended trading. They had closed at $422.92 in New York.
“It was really about the cloud services number — it needed to just be a little higher,” Doug Clinton, a managing partner at Deepwater Asset Management, said on Bloomberg Television. Still, the accelerated contribution from AI confirms business momentum with that emerging technology, wrote Raimo Lenschow, an analyst at Barclays.
Chief Executive Officer Satya Nadella has been infusing 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 is selling Azure cloud subscriptions featuring OpenAI products.
Alongside peers like Amazon.com Inc. and Google, Microsoft has been constructing new data centers to meet demand for cloud computing and power-hungry AI services. Capital expenditures, closely watched by investors as the company embarks on this historic build-out, jumped to $19 billion, including server farm leases, from $14 billion in the previous quarter.
Skittish Investors
In recent weeks, skittish investors have signaled impatience with tech companies’ efforts to profit from their massive investments in AI. Last week, Alphabet Inc .shares sank after the company surprised Wall Street with sharply higher costs that overshadowed strong sales.
In an interview, investor relations chief Brett Iversen said Microsoft currently lacks sufficient capacity to fulfill customer demand for cloud and AI services. “We’re building out for that as quickly as we can,” he said.
Many of Microsoft’s corporate customers are only just starting to use new AI assistants, which still struggle to understand the context of some requests and handle commands involving multiple apps. The Copilot service, which doubles the cost of a monthly subscription to about $60 per user for corporations, is expected to eventually generate a robust flow of recurring revenue.
Iverson said customers are increasingly adopting the company’s higher-tier Office 365 product, which includes generative AI features. Sales from commercial cloud products including Azure and office applications, rose 21% to $36.8 billion, Microsoft said, about in line with Wall Street estimates.
The company’s Xbox video-gaming unit posted 61% growth in content and services revenue, much of that fueled by the $69 billion purchase of Activision Blizzard.
Hours before reporting its financial results, Microsoft’s Azure and Office 365 services suffered partial outages, which also took down services by customers including Starbucks Corp.
Just a couple of weeks earlier, some 8 million computers running Microsoft’s Windows operating system crashed after the cybersecurity firm CrowdStrike Holdings Inc. released a flawed software update. Though the outage was caused by Crowdstrike, “Microsoft may still have to deal with negative perception around perceived vulnerabilities to its operating system,” Tyler Radke, an analyst at Citigroup, wrote ahead of earnings.
©2024 Bloomberg L.P.
