Microsoft’s significant cloud division experienced slower growth than anticipated by Wall Street, as the company faced challenges in meeting customer demand for artificial intelligence services. In the quarter ending in December, the Seattle-based tech giant exceeded analysts’ projections for both revenue and net income, yet its cloud unit—primarily driven by the Azure cloud computing platform—fell short of expectations.
Despite a remarkable 157 percent year-on-year growth in revenue from Azure’s AI services, Chief Financial Officer Amy Hood indicated that the company foresees an “ongoing impact” from capacity limitations extending into 2025 as it addresses execution issues. She mentioned that these constraints should begin to ease by the end of the fiscal year.
The overall cloud division reported a revenue increase of 21 percent to $40.9 billion year-on-year, slightly below the $41.1 billion anticipated in a Bloomberg survey. This shortfall triggered a decline of over 4 percent in shares during after-hours trading, resulting in an approximate loss of $150 billion in market value.
Total revenue for the quarter reached a record $69.6 billion, reflecting a 12 percent year-on-year increase, while net income rose by 10 percent to $24.1 billion, surpassing the Bloomberg survey’s average estimate of $23.5 billion.
In its second quarter, Microsoft allocated $22.6 billion towards capital expenditures, doubling its spending from the previous year. The company announced a projected total capital expenditure of around $80 billion for the fiscal year ending June 30, aimed at expanding the data center infrastructure necessary for AI model training and application deployment.
Concerns are emerging on Wall Street about China’s DeepSeek, which claims to carry out AI tasks comparably to major U.S. firms like Microsoft’s OpenAI, but at significantly lower costs. Chief Executive Satya Nadella acknowledged DeepSeek’s “real innovation,” noting it matched the performance of OpenAI’s o1 model, known for addressing complex scientific queries.
Nadella stated that the advancements in AI would become more commoditized and broadly utilized, benefiting customers significantly. He emphasized that the transition to cloud computing taught that lower resource costs typically lead to higher demand.
Microsoft has notably capitalized on the AI surge, with heightened demand for its cloud services complemented by the excitement surrounding its $13 billion alliance with OpenAI, placing it among a select group of companies with market valuations exceeding $3 trillion. OpenAI’s models support Microsoft’s Copilot chatbot, and its large language model is accessible to customers through Azure.
Recently, Microsoft announced changes to its agreement with OpenAI, allowing the startup to utilize competing cloud services while retaining a right of first refusal. This adjustment aligns with OpenAI’s plans, in collaboration with Oracle and Japan’s SoftBank, to construct at least $100 billion worth of AI infrastructure in the U.S. under a project named Stargate, with Microsoft serving as a technical partner.
Nadella emphasized the shared success between Microsoft and OpenAI, attributed to continued commercial arrangements, while recognizing the necessity to optimize costs, remarking, “You don’t want to buy too much of anything at one time.” Microsoft also reported a 67 percent rise in commercial demand for its services in the quarter, driven primarily by commitments from OpenAI.
photo credit: www.ft.com
