Item 1 of 2 A view showing the Microsoft logo of the Microsoft office in Issy-les-Moulineaux, near Paris, France, on March 25, 2024. REUTERS/Gonzalo Fuentes/File Photo
Jan 28 (Reuters) – Microsoft spent a record amount on artificial intelligence last quarter and said on Wednesday that growth in cloud computing had slowed, worrying investors who had hoped for big returns from that spending and a huge deal with OpenAI.
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Microsoft’s strategic partnership with OpenAI, which the tech giant plans to spend at least $281 billion on, was once seen by investors as the company’s strongest competitive advantage in the artificial intelligence race. But as Google’s Gemini progresses to attract big customers like Apple, that’s turned into a potential drawback for the Redmond, Washington-based company.
In a conference call with analysts, Microsoft executives tried to convince Wall Street to evaluate the company’s success in AI by looking not just at the company’s revenue from selling cloud computing services, but also at its growing business by selling its own AI assistant. For the first time, the company revealed core metrics for business usage of Copilot Assistant.
But despite Microsoft CEO Satya Nadella’s insistence that AI is still in its “early stages,” the company has spent more than $200 billion on the technology since the start of fiscal year 2024, and investors’ patience is wearing thin.
“Obviously one of the big issues is that revenue is up 17% and cost of revenue is up 19%. So if this is a new long-term trend, that’s one of my concerns,” said Eric Clark, portfolio manager at the Logo ETF, which owns Microsoft stock.
The technology giant said its Azure cloud division’s revenue increased 39% in the October-December period, the second quarter of its fiscal year. This was slightly above the consensus estimate of 38.8%, according to Visible Alpha.
First mover advantage
The Windows maker has long enjoyed a first-mover advantage in the Big Tech AI race thanks to its early bet on OpenAI. OpenAI’s technology powers most of its products, including the M365 Copilot.
Microsoft owns a 27% stake in the ChatGPT maker, and last year’s recapitalization efforts helped boost overall Microsoft profits after a change in how equity is accounted for.
But high praise for Google’s latest Gemini model and the launch of autonomous agents such as Anthropic’s Claude Cowork pose risks to both Microsoft’s AI business and the software products that have long been the company’s core.
Microsoft predicts Azure revenue growth of 37% to 38% for the third quarter of the current fiscal year, according to data from Visible Alpha. This compares to analyst expectations of 36.41%. The company forecast overall sales within the midpoint range of $81.2 billion, in line with analyst estimates of $81.19 billion, according to LSEG data.
Chief Financial Officer Amy Hood said capital spending will be down slightly from the just-completed quarter, but noted that over time, rising costs for memory chips will begin to weigh on Microsoft’s cloud computing profits.
M365 co-pilot user number released
CEO Nadella revealed for the first time that M365 Copilot, Microsoft’s $30-a-month AI assistant for business users, currently has 15 million annual users. This figure does not include the use of Microsoft’s more limited chat features, which are unlicensed for the software.
Nadella argued that a significant portion of Microsoft’s capital spending supports its products, which have historically been profitable over the long term.
“We want to be able to allocate capacity in a way that essentially allows us to build the best (lifetime value) portfolio, even with supply constraints,” Nadella said on a conference call.
Competition is weighing on Microsoft’s stock price as investors question whether the big tech company will generate enough returns to offset its AI investments.
Microsoft’s capital spending totaled $37.5 billion in the reported quarter, an increase of nearly 66% from a year earlier, with about two-thirds of the spending going to computing chips. That beat market expectations of $34.31 billion, according to Visible Alpha.
Total revenue for the second quarter rose 17% to $81.3 billion, compared to analysts’ expectations of $80.27 billion based on estimates compiled by LSEG.
But about 45% of Microsoft’s remaining performance obligations are driven by OpenAI alone, underscoring its dependence on startups, with the company pledging to spend about $1.4 trillion on AI overall, but with few details about how it plans to fund that spending.
Microsoft said its cloud backlog, excluding OpenAI, rose 28%, including a $30 billion deal with Claude maker Anthropic.
Deborah Sofia and Aditya Soni report in Bangalore and Stephen Nellis in San Francisco. Editing: Alan Barona, David Gregorio, Jamie Freed
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