Microsoft capital spending jumps, cloud revenue fails to impress
The tie-up with OpenAI, once an edge, now faces risks as Google’s Gemini wins clients like Apple
[SAN FRANCISCO] Microsoft said on Wednesday (Jan 29) it had spent a record amount on artificial intelligence in the last quarter and posted slower cloud-computing growth, worrying investors who had expected a major payoff from the outlay and its mega-deal with OpenAI.
Microsoft’s shares tumbled 6.5 per cent in after-market trading after the company released its fiscal second-quarter financial results.
The tech giant’s strategic partnership with OpenAI, which plans to spend at least US$281 billion with Microsoft, was once seen by investors as its strongest competitive advantage in the artificial intelligence race. But that has morphed into a possible drawback for the Redmond, Washington-based firm as Google’s Gemini makes progress in winning massive customers such as Apple.
On a conference call with analysts, Microsoft executives tried to persuade Wall Street to assess its success in AI by looking not only at its sales from selling cloud computing services, but also at its increasing business selling AI assistants of its own.
The company for the first time disclosed core metrics about business usage of its Copilot assistant. But despite Microsoft CEO Satya Nadella’s insistence that AI remains in the “early innings,” the company has spent more than US$200 billion on the technology since the start of its fiscal 2024, and investor patience is waning.
“One big obvious issue is that revenues are up 17 per cent and the cost of revenues are up 19 per cent. So if that is a new long-term trend, that is one of my concerns,” said Eric Clark, portfolio manager of the LOGO ETF, which holds Microsoft shares.
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The tech giant said revenue at its Azure cloud division grew 39 per cent in the October-to-December period, its fiscal second quarter. That just squeaked past a consensus estimate of 38.8 per cent, according to Visible Alpha.
First-mover advantage
The Windows maker has long enjoyed a first-mover advantage in Big Tech’s AI race thanks to its early bet on OpenAI, whose technology powers most of its offerings, including M365 Copilot. Microsoft owns a 27 per cent stake in the ChatGPT maker, whose recapitalisation effort last year helped push Microsoft’s overall earnings upward after a change in how it accounts for its stake.
But a strong reception for Google’s latest Gemini model and the launch of autonomous agents such as Anthropic’s Claude Cowork have posed risks both to Microsoft’s AI business and the software offerings that have long been central to the company.
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For the current fiscal third quarter, Microsoft forecast Azure revenue growth of 37 per cent to 38 per cent, versus analyst estimates of 36.41 per cent, according to data from Visible Alpha.
The company forecast overall sales in a range with a midpoint of US$81.2 billion, in line with analyst estimates of US$81.19 billion, according to LSEG data. chief financial officer Amy Hood said capital spending will be slightly lower than in the just-completed quarter but noted that over time, the rising cost of memory chips will start to weigh on Microsoft’s cloud computing margins.
M365 copilot user numbers disclosed
CEO Nadella revealed for the first time that Microsoft now has 15 million annual users for M365 Copilot, the US$30 per month AI assistant that is Microsoft’s main offering for business users. The figure does not include use of Microsoft’s more limited chat features without a licence for the software.
Nadella argued that a meaningful portion of Microsoft’s capital spending is supporting its own products, which have historically been profitable over the long term. “We want to be able to allocate capacity while we’re supply constrained in a way that allow us to essentially build the best (lifetime value) portfolio,” Nadella said on the conference call.
Competition has weighed on Microsoft’s stock as investor doubts persist over whether Big Tech will deliver enough returns to make up for the AI spending. Collectively, Microsoft, Alphabet, Meta and Amazon are expected to spend more than US$500 billion on AI this year.
In the reported quarter, Microsoft’s capital spending totalled US$37.5 billion, a jump of nearly 66 per cent from last year and with about two-thirds of the spending going towards computing chips. That was more than market estimates of US$34.31 billion, according to Visible Alpha.
Total revenue rose 17 per cent to US$81.3 billion in the second quarter, while analysts expected US$80.27 billion, based on estimates compiled by LSEG.
Microsoft said the contracted backlog in its cloud business more than doubled to US$625 billion. The figure was above the US$523 billion reported by cloud rival Oracle in December.
But roughly 45 per cent of Microsoft’s remaining performance obligation was driven by OpenAI alone, underscoring its reliance on the startup, which has pledged around US$1.4 trillion in overall AI expenditure with few details on how it plans to fund the spending.
Microsoft said that excluding OpenAI, its cloud backlog grew at 28 per cent, even when including a US$30 billion deal with Claude-maker Anthropic.
Late October’s major OpenAI restructuring gave Microsoft that stake. And while the overhaul included a commitment from OpenAI to buy US$250 billion of Azure services, it also freed the ChatGPT creator to pursue cloud deals with other companies that could lower its reliance on Microsoft. REUTERS
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