(Bloomberg) -- Microsoft Corp.’s cloud-computing and Office software businesses fueled stronger-than-projected quarterly revenue growth, a sign that the company’s hefty investments in artificial intelligence are starting to pay off.
Sales in the first quarter, which ended Sept. 30, increased 16% to $65.6 billion, the company said in a statement Wednesday. Profit rose to $3.30 a share. Analysts on average estimated sales of $64.5 billion and per-share earnings of $3.11, according to Bloomberg data.
The Azure cloud-computing division posted a 34% revenue gain in the quarter, adjusted for currency fluctuations. That decelerated slightly from the 35% growth in the previous period but was slightly ahead of Microsoft’s earlier forecast, according to some analysts.
Chief Executive Officer Satya Nadella has overhauled the software maker’s product line with AI models from partner OpenAI. He’s now seeking to recruit enough paying customers to the souped-up software and services to drive Microsoft’s growth for years to come. At the same time, corporations are tapping the company’s data-center capacity to power development of their own AI applications, buoying demand in its closely watched Azure business.
“People are shifting from just talking about artificial intelligence and testing and piloting artificial intelligence to actually putting it into production,” said Jackson Ader, an analyst at Keybanc.
Microsoft shares gained about 1% in extended trading following the report. They had closed up less than 1% to $423.53 in New York. The stock fell 3.7% in the quarter compared with a 5.5% increase in the Standard and Poor’s 500 Index, reflecting Wall Street concerns that Microsoft isn’t yet realizing sufficient gains from its AI investments, and may risk falling behind as rivals pile into the market.
AI Contribution
The company’s main sources of AI-related income fall into two categories — cloud services and AI-enhanced productivity assistants baked into Office, which help workers summarize emails, transcribe conference calls and create slideshows. The company said 12 percentage points of Azure’s growth was attributable to AI, compared with 11 points in the June quarter.
Microsoft’s overall cloud revenue, a mix of sales from products such as Office and Azure cloud sales, rose 22% to $38.9 billion.
The results come a day after Alphabet Inc.’s Google posted quarterly cloud sales that grew more than analysts had projected, rising to $11.4 billion, a 35% increase from the year-earlier period. Amazon.com Inc., the biggest cloud provider, is scheduled to report earnings on Thursday.
Like Google and Amazon, Microsoft has ramped up spending to construct and rent the data centers required to fuel power-hungry AI services. Microsoft even struck a deal recently to purchase nuclear power from a restarted reactor at Three Mile Island in an effort to ensure that it has sufficient electricity to meet its growing needs.
Chief Financial Officer Amy Hood said Azure growth and the company’s efforts to serve cloud and AI clients continue to be constrained by a lack of data center capacity. “We are in short supply, and so we remain focused on getting that into a more balanced position,” she said in an interview.
Quarterly capital expenditures, at $14.9 billion, were a record, up 50% from the same period a year earlier and exceeding analysts’ expectations. Prior to 2020, Microsoft had never spent that much on property and equipment over the course of a full year.
“Our fear is the more they throw into data center buildout, the more the drag is going to be on margins,” said Gil Luria, an analyst at D.A. Davidson & Co., who cut his rating on Microsoft shares to “neutral” during the quarter. “That isn’t happening yet. They’ve been able to cut enough costs elsewhere to still expand margins.”
Microsoft has been signing up corporate clients to use its AI-infused Office services, which carry a monthly list price of $30 per user, in addition to the cost of the basic Office product. Because of that expense, and because the products are still at an early stage of readiness, some clients have moved slowly with trials and deployments.
Still, the price increases are starting to benefit Microsoft. Average revenue per user is ticking up, Hood said in the interview, owing both to the AI offering and a higher-priced version of the Office suite called E5.
Search ad revenue also posted better-than-expected growth of 19%, excluding the impact of currency, Hood said. Microsoft has been baking AI into its Bing search service, and these improvements have boosted both user volume and the prices advertisers are willing to pay, she said.
--With assistance from Matt Day and Vlad Savov.
(Updates with CFO’s comments beginning in 10th paragraph.)
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