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Artificial intelligence helped boost Microsoft’s cloud sales past analysts’ forecasts, as demand for the high-profile technology challenges the company’s capacity to keep up with its rivals.
The Seattle-based group, which has become a bellwether for the rapidly developing generative AI industry, on Thursday reported revenue and earnings ahead of analyst estimates for the three months to March 31. It said it would increase capital spending in support of the technology behind chatbots and smart assistants.
“Near-term AI demand is a bit higher than our available capacity,” said chief financial officer Amy Hood, which would affect the computing power available to customers looking to deploy generative AI systems.
The need to meet demand was fuelling an increase in spending on infrastructure such as data centres, with capital expenditures expected to increase “materially”, Hood said. Capex rose to $14bn in the quarter, compared with $11.5bn in the previous three months.
Microsoft took an early lead in the race to dominate generative AI thanks to its $13bn investment in OpenAI, the company behind ChatGPT, and this year invested in AI start-up Mistral and hired the bulk of the staff of rival AI start-up Inflection.
The upbeat report cheered investors, who have been clamouring for evidence that Big Tech companies can convert their huge investments in generative AI into paying customers and healthy profits.
Microsoft shares — which have risen 7.6 per cent this year to make it the world’s most valuable company by market capitalisation — were up 4.4 per cent in after-hours trading. That contrasted with Facebook and Instagram parent Meta whose shares have fallen this week after it warned capex would balloon this year and next as it increases its investment in AI.
One flagship Microsoft product being closely watched is the 365 Copilot generative AI assistant, which has been integrated into its suite of productivity apps. It has so far not disclosed sales or user figures for Copilot, which is priced at $30 per user a month for businesses.
Satya Nadella, Microsoft chair and chief executive, said nearly 60 per cent of Fortune 500 companies now used Copilot, which was experiencing “accelerated adoption”. Hood said on Thursday that the AI capacity constraints were not affecting the uptake of Copilot, and that ensuring that remained the case was a “priority”.
Sales in Microsoft’s cloud division, its biggest revenue driver that includes its Azure computing platform, climbed 21 per cent during the quarter to $26.7bn, compared with analysts’ forecasts for $26.2bn and above company guidance.
Revenue at Azure rose by 31 per cent, stripping out the effect of currency movements, also ahead of guidance. Demand for Microsoft’s AI services boosted sales by 7 percentage points during the quarter, up from 6 in the previous quarter and 3 in the one before that.
Hood said the size of deals with companies to use Azure were growing and that the pace of cloud sales growth in the first three months of the year would be similar in the current quarter. However, she cautioned that AI capacity constraints could hold back the increase in sales.
Revenue climbed 17 per cent to $61.9bn in the quarter, compared with analyst expectations for $60.80bn. Earnings per share rose to $2.94, ahead of expectations for $2.82.
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