Microsoft on Tuesday beat Wall Street estimates for fiscal first-quarter results in all segments, driven particularly by strength in its cloud-computing and PC businesses.
The company’s revenue rose 13 per cent to $56.5 billion in the quarter ended Sept. 30, compared with analysts’ consensus estimate of $54.52 billion, according to LSEG data.
Microsoft shares were up 4.2 per cent in after-hours trading.
“The results indicated that artificial intelligence products are stimulating sales and already contributing to top and bottom-line growth,” said Jesse Cohen, senior analyst at Investing.com.
Revenue from Microsoft’s Intelligent Cloud unit, which houses the Azure cloud-computing platform, grew to $24.3 billion, compared with analysts’ estimate of $23.49 billion, LSEG data showed. Azure revenue rose 29 per cent, higher than a 26.2 per cent growth estimate from market research firm Visible Alpha.
The company does not break out the absolute revenue figure for Azure, the part of Microsoft’s business best situated to capitalize on booming interest in artificial intelligence.
Wall Street is looking at how generative AI services may benefit Microsoft, which secured an early lead with investments in startup OpenAI, owner of the popular ChatGPT service.
Many of those AI services are not yet widely available. Brett Iversen, Microsoft’s vice president for investor relations, said much of the sales growth reported on Tuesday came from customers rekindling their use of Microsoft’s cloud in anticipation of using those services.
“What AI is doing … is opening up either new conversations or extending existing conversations or getting us back in touch with customers that we maybe weren’t doing as much with,” Iverson told Reuters.
Alphabet's cloud division misses revenue estimates
By comparison, Google-parent Alphabet’s cloud business crawled to its slowest in 10 quarters, sending the company’s stock down 5.7 per cent after hours.
The drop in Google’s share price despite beating Wall Street estimates for profit and sales, shows how much investors want the company to deliver gains in artificial intelligence, and show the cloud business remains competitive against a more powerful Azure from Microsoft and Amazon.com’s AWS.
Fears of a slowing global economy have prompted companies to curb spending on cloud-related services, including expensive AI tools, which has slowed revenue growth at Google’s cloud unit to 22.5 per cent in the third quarter, from 28 per cent in the prior three-month period.
Google Cloud third-quarter revenue rose 22.5 per cent to $8.41 billion, the slowest growth since at least the first quarter of 2021. The cloud unit reported a operating income of $266 million, compared with an operating loss of $440 million a year ago. Wall Street expected cloud computing revenue of $8.62 billion.
Finance chief Ruth Porat said in a conference call Tuesday that the third-quarter cloud growth is due to “customer optimization efforts,” without elaborating.
The company recorded ad revenue of $59.65 billion in the third quarter, compared with $54.48 billion a year earlier. Analysts on average had expected $59.12 billion in revenue from its advertising business. Within the company’s advertising segment, YouTube ads reported revenue of $7.95 billion compared with $7.07 billion last year.
Alphabet reported a net profit of $19.69 billion for the July-Sept. period, compared with $13.91 billion a year earlier.
Revenue for the quarter ended Sept. 30 stood at $76.69 billion, compared with estimates of $75.97 billion, according to LSEG data.
Microsoft weaving AI into products
Microsoft said on Tuesday that its fiscal first-quarter profit was $2.99 per share, above analyst estimates of $2.65 per share, according to LSEG data.
“There are some weaker areas; search advertising revenues, for one, is growing slower than most segments,” said Jeremy Goldman of research firm Insider Intelligence.
Microsoft said search and news advertising revenue excluding traffic acquisition costs increased by 10 per cent. It does not break out the revenue figure for these operations.
Microsoft is weaving AI into its own products, such as the $30-a-month “Copilot” for its Microsoft 365 service that can summarize a day’s worth of emails into a quick update. While the tool is being shown only to a small number of pilot customers until it becomes available next month, it requires businesses to make a number of upgrades to their Microsoft-based systems in order to use Copilot. Analysts say this could generate sales for the Redmond, Washington, company ahead of Copilot’s wide release.
Investors are also tracking how much Microsoft spends on the massive data centers to power AI software. Microsoft said on Tuesday that fiscal first-quarter capital expenditures were $11.2 billion, up from $10.7 billion in the previous quarter, which itself was the biggest spend since at least fiscal 2016.
Sales of its Windows operating system and other products in the segment grew to $13.7 billion, compared with analysts’ consensus estimate of $12.82 billion, according to data from LSEG.
The segment containing the LinkedIn social network and its office productivity software grew to $18.6 billion, compared with analysts’ consensus estimate of $18.20 billion, according to LSEG data.
–Reporting by Anna Tong, Stephen Nellis and Max A. Cherney in San Francisco, Yuvraj Malik and Akash Sriram in Bengaluru; Editing by Devika Syamnath, Peter Henderson, Matthew Lewis, Anil D’Silva and Aurora Ellis