Microsoft’s Cloud Revenue Disappoints But Satya Nadella Remains Committed to A.I. Spending
"We know how to manage our CapEx spend to build out a long-term asset," said Microsoft CEO Satya Nadella.
Microsoft (MSFT) neon sign hanging above him" width="970" height="647" data-caption='Microsoft CEO Satya Nadella is confident that his bet on A.I. will pay off. <span class="lazyload media-credit">Jason Redmond/AFP via Getty Images</span>'>
Microsoft is going all in on A.I. The world’s most valuable company yesterday (July 30) reported capital expenditures (CapEx) of $19 billion for the April-June quarter, up 78 percent from a year ago. The majority went towards cloud and A.I.-related projects. “We know how to manage our CapEx spend to build out a long-term asset,” Microsoft CEO Satya Nadella told analysts when asked whether Microsoft’s A.I. investments will soon pay off.
The company’s Intelligent Cloud unit, which includes the Azure cloud computing platform alongside Github, server products and enterprise services, generated $28.5 billion in quarterly revenue, up 19 percent from a year ago but narrowly missing Wall Street expectations. Surpassing analyst estimates, however, were Microsoft’s total revenue and net income, which increased by 15 percent and 10 percent respectively to $64.7 billion and $22 billion. Microsoft shares were down by more than 1.6 percent as of this morning.
Roughly half of the $19 billion capital expenditures went towards infrastructure needs, namely Microsoft’s efforts to build and lease data centers powering its A.I. models. These efforts “will support monetization over the next 15 years and beyond,” said Microsoft’s chief financial officer Amy Hood during yesterday’s earnings call. The remainder was used to acquire servers consisting of both graphics processing units (GPUs) and central processing units (CPUs), she said.
Microsoft attempts to ease investor concerns over spending
In an attempt to ease concerns surrounding Microsoft’s aggressive A.I. spending, including a $13 billion partnership with OpenAI, Nadella noted the importance of managing to “capture the opportunity.” In addition to highlighting Microsoft’s new A.I. chip purchases from Nvidia (NVDA) and AMD (AMD), he lauded the company’s investments in data centers across four continents as “long-term assets around the world to drive growth for the next decade and beyond.”
Microsoft’s Azure unit and other cloud services revenue grew 29 percent during the quarter, 8 percent of which can be attributed to the company’s A.I. services. The company expects Azure growth to accelerate in the second half of the year “as our capital investments create an increase in available A.I. capacity to serve more of the growing demand,” said Hood. Azure A.I. is now used by 60,000 customers, according to Nadella, representing a 60 percent increase from the year prior.
Meanwhile, Microsoft’s integration of its Copilot A.I. assistant on GitHub has contributed to more than 40 percent of growth this year for the developer platform. And the use of Copilot for Microsoft 365 products has grown by 60 percent in a year. In light of Microsoft’s predictions for continuing progress across its Intelligent Cloud segment and Copilot user growth, Wall Street will be “digesting a very upbeat commentary about A.I. deployments,” said Wedbush Securities analyst Dan Ives in an investor note.
Microsoft also reported growth across its Productivity and Business Processes unit, which encompasses Office, LinkedIn and Dynamics, noting an 11 percent increase in revenue to $20.3 billion. And the company’s More Personal Computing unit, which includes Surface devices, Windows and Xbox gaming consoles, brought in $15.9 billion, representing a 14 percent increase year-over-year. This segment includes Microsoft’s first A.I. computer lineup, Copilot+ PCs, launched in June. “We are delighted by early reviews,” Nadella told analysts, adding that “we look forward to the introduction of more Copilot+ PCs powered by all of our silicon and OEM partners in the coming months.”