Microsoft’s Azure growth slows, testing investors’ patience

Microsoft Corporation’s Azure cloud service posted a slowdown in quarterly growth, disappointing investors anxious to see a payoff from huge investments in artificial intelligence (AI) products.

Revenue from Azure, Microsoft’s main growth engine in recent years, rose 29 per cent in the quarter, decelerating from the 31 per cent growth in the previous period. About 8 percentage points of that increase was attributable to AI, up from 7 percentage points in the prior quarter.

“It was really about the cloud services number – it needed to just be a little higher,” Deepwater Asset Management managing partner Doug Clinton said on Bloomberg Television. Still, the accelerated contribution from AI confirms business momentum with that emerging technology, wrote Barclays analyst Raimo Lenschow.

Chief executive officer Satya Nadella has been infusing Microsoft’s product line with AI technology from partner OpenAI, including digital assistants called Copilots that can summarise documents and generate computer code, e-mails and other content. The company is also selling Azure cloud subscriptions featuring OpenAI products. Alongside rivals like Amazon.com and Google, Microsoft has been spending billions to construct new data centres to meet demand for cloud computing and power-hungry AI services.

On a call with analysts on July 30, chief financial officer Amy Hood said that although Azure growth will continue to slow in the current quarter, which ends in September, investments in data centres and servers will let the company capitalise on demand and accelerate Azure growth in the second half of fiscal 2025.

In the fourth quarter, which ended June 30, capital expenditures – closely watched by investors as the company embarks on its historic AI build-out – jumped to US$19 billion (S$25.5 billion), including server farm leases, from US$14 billion in the previous quarter. That number will increase in the new fiscal year, Ms Hood said.

In an interview, investor relations chief Brett Iversen said Microsoft currently lacks sufficient capacity to fulfill customer demand for cloud and AI services. “We’re building out for that as quickly as we can,” he said.

In recent weeks, skittish investors have signalled impatience with tech companies’ efforts to profit from their massive investments in AI. Last week, Alphabet shares sank after the company surprised Wall Street with sharply higher costs that overshadowed strong sales.

Many of Microsoft’s corporate customers are only just starting to use new AI assistants, which still struggle to understand the context of some requests and handle commands involving multiple apps. The Copilot service, which doubles the cost of a monthly subscription to about US$60 per user for corporations, is expected to eventually generate a robust flow of recurring revenue.

Mr Iversen said customers are increasingly adopting the company’s higher-tier Office 365 product, which includes generative AI features. Sales from commercial cloud products, including Azure and office applications, rose 21 per cent to US$36.8 billion, Microsoft said, about in line with Wall Street estimates. 

Total revenue in the fourth quarter increased 15 per cent to US$64.7 billion, while adjusted profit was US$2.95 a share, the company said in a statement July 30. Analysts on average estimated sales of US$64.5 billion and per-share earnings of US$2.94.

On the call, Mr Nadella said the number of people using Copilot at work doubled quarter over quarter. Use of Copilot within GitHub, which allows for AI assistance in software development, accounts for 40 per cent of revenue growth within that business, he added

The company’s Xbox video-gaming unit posted 61 per cent growth in content and services revenue, much of that fuelled by the US$69 billion purchase of Activision Blizzard.

Hours before reporting its financial results, Microsoft’s Azure and Office 365 services suffered partial outages, which also took down services by customers including Starbucks Corp. 

Just a couple of weeks earlier, some eight million computers running Microsoft’s Windows operating system crashed after the cyber-security firm CrowdStrike Holdings released a flawed software update. Though the outage was caused by Crowdstrike, “Microsoft may still have to deal with negative perception around perceived vulnerabilities in its operating system,” Citigroup analyst Tyler Radke wrote ahead of earnings.

Nadella touted progress in the company’s cyber-security products during the call with investors. The company says it has more than 1.2 million security customers, and Defender for Cloud, a security product, passed US$1 billion in revenue over the past year. “We continue to prioritize security above all else,” Mr Nadella said. BLOOMBERG