Microsoft on Tuesday laid out an aggressive spending plan to meet demand for its new artificial intelligence services after surpassing Wall Street estimates for fiscal fourth-quarter revenue and profit.
Costs rose sharply as Microsoft built new data centers to
support AI, and Chief Financial Officer Amy Hood said on a conference call with
analysts the company's capital expenditures would continue rising each quarter
throughout fiscal 2024.
Shares fell about 4 percent in after-hours trade.
Wall Street is looking at how generative AI services may
benefit Microsoft, which secured an early lead with investments in OpenAI,
owner of the popular ChatGPT service.
Microsoft is weaving AI into its own products, such as the
$30 -a-month "Copilot" assistant for its Microsoft 365 service that
can summarize a day's worth of emails into a quick update. It is also aiming to
sell cloud computing services that other firms will use to build AI services.
Microsoft's results show heavy spending on AI services ahead
of commensurate revenue growth.
While its Azure sales growth slightly exceeded market
expectations, Microsoft's quarterly capital expenditures hit the highest
single-quarter total since at least its fiscal 2016. The company is battling
other cloud providers for a limited supply of chips from Nvidia, whose graphics
processing units are essential for creating AI products and services.
CFO Hood told analysts that despite Microsoft's increased
spending in fiscal 2024, operating profit margins would grow slightly after
adjusting for the effects of an accounting rule change. "The real focus
here is being able to be aggressive in meeting the demand curve," Hood
said.
It will take time to make money, Hood said, noting that
Copilot is not ready for general release and any revenues from the product are
likely to happen toward the second half of fiscal 2024.
Microsoft forecast Azure revenue growth of 25 percent-26
percent in constant currency for the fiscal first quarter, compared with an
estimate of 25.6 percent from Visible Alpha that does not adjust for foreign
exchange rates.
For the segment that includes Azure, Microsoft forecast a
first-quarter revenue range with a midpoint of $23.45 billion. Analysts on
average estimated $23.55 billion according to Refinitiv data.
The midpoint of its first-quarter forecast for the segment
containing Office was $18.15 billion, compared with analysts' consensus
estimate of $18.08 billion.
Microsoft's forecast for its Windows segment had a midpoint
of $12.7 billion, below analysts' estimate of $13.14 billion.
Revenue in the fiscal fourth quarter that ended June 30 rose
to $56.2 billion, beating the consensus estimate of $55.5 billion according to
Refinitiv. Net income was $2.69 per share, above the $2.55 average estimate.
Microsoft's Intelligent Cloud unit, which houses the Azure
cloud computing platform, increased its revenue to $24 billion slightly topped
expectations according to Refinitiv data.
Azure revenue rose 26 percent, beating a 25.2 percent growth
estimate from Visible Alpha.
Microsoft does not break out a precise quarterly revenue
figure for Azure, the part of its business best situated to capitalize on
booming interest in AI. But Chief Executive Satya Nadella said on a conference
call that Azure accounted for more than half of the $110 billion for
"Microsoft Cloud" in fiscal 2023, putting Azure sales at $55 billion
or more and revealing the size of the business for the first time.
The company is still navigating a PC business slump with
sales, including those of its Windows operating system, falling to $13.9
billion. The segment with the LinkedIn social network and its Office
productivity software increased sales to $18.3 billion. Both segments slightly
topped the average analyst estimate, according to Refinitiv data.
Capital expenditures jumped to $10.7 billion from $7.8
billion in the fiscal third quarter, after the company told investors spending
would rise as it builds out data centers for AI work.
Microsoft has started integrating AI functionality across
its products such as Azure, Microsoft 365, GitHub, and several developer tools.
© Reuters