Microsoft’s cloud revenue is boosted by AI

Microsoft’s cloud services sales surpassed analysts’ expectations, as the demand for this high-profile technology is challenging the company’s ability to keep up.

The Seattle-based company, which is a bellwether of the rapidly growing AI industry that generates new products, reported Thursday revenue and earnings above analyst expectations for the three months ending March 31. It announced that it would increase its capital expenditures to support the technology behind smart assistants and chatbots.

Amy Hood, chief financial officer at Microsoft, said that the demand for AI in near-term is higher than their capacity. This would impact on the computing power customers have available when deploying generative AI systems.

Hood stated that the need to meet customer demand is driving an increase in infrastructure spending, such as on data centres. Capital expenditures are expected to rise “materially” Hood added. Capex increased to $14bn during the third quarter, up from $11.5bn the previous three-month period.

Microsoft has taken an early lead to dominate generative AI with its $13bn investments in OpenAI and ChatGPT. This year, Microsoft invested in AI startup Mistral, and hired most of the staff from rival AI start up Inflection.

The report’s positive tone cheered up investors who were eager to see proof that Big Tech can turn their massive investments in generative AI technology into paying customers and healthy profit.

Microsoft shares, which are up 7.6 percent this year and have become the most valuable company in the world by market cap, were up 4.4% after-hours. Meta, the parent company of Facebook and Instagram, saw its shares fall this week as it warned that capex will increase this year and in 2019.

Microsoft’s generative AI assistant 365 Copilot, which is integrated into the suite of productivity apps, is a flagship product that will be closely monitored. Copilot is priced at $30 a month per user for businesses. Microsoft has not yet disclosed any sales figures or user numbers.

Satya Nadella is the Microsoft chairman and CEO. He said that Copilot was being “accelerated” by nearly 60% of Fortune 500 companies. Hood stated on Thursday that AI capacity limitations were not affecting Copilot’s uptake, and that it was “a priority” to ensure that this remained true.

Microsoft’s Cloud division, which includes the Azure computing platform, saw sales rise 21 percent during the third quarter, to $26.7bn. This was above analyst expectations of $26.2bn as well as company guidance.

Azure’s revenue grew by 31%, excluding the impact of currency fluctuations, and also exceeded guidance. Microsoft’s AI-based services drove sales up by 7 percentage points in the third quarter. This is an increase from the 6 percentage points in the previous quarter as well as the 3 percentage point jump in the prior quarter.

Hood stated that Azure deals were getting bigger and the growth rate of cloud sales in the first quarter of the year will be the same in the current period. She warned that AI capacity limitations could slow down the growth in sales.

Analysts had expected $60.80bn. Revenue rose by 17 percent to $61.9bn. Earnings per Share rose to $2.94 compared with expectations of $2.82.