Microsoft Cloud Unit Misses, Dulls Bright Earnings

AFP/APP

San Francisco: Microsoft shares slipped Tuesday after the tech giant reported a quarterly profit increase, but its crucial cloud computing unit missed expectations.

Microsoft reported a profit of $22 billion on $64.7 billion in revenue for the recently ended quarter, up from the same period a year earlier. However, the cloud unit’s revenue of $36.8 billion disappointed investors, causing shares to slide more than three percent to $408 in after-market trades.

Cloud computing has driven blockbuster earnings quarter after quarter, and any hint of slowing growth was enough to give investors pause. “While there will be some knee-jerk reaction in Microsoft stock after hours, we believe the takeaways for the broader tech sector is this AI monetization story is real,” Wedbush analyst Dan Ives said in a note to investors.

Microsoft is a major contender in the race to build out artificial intelligence systems, having invested billions in the technology. The company has poured $13 billion into OpenAI, the startup behind ChatGPT, and is keen to monetize generative AI, having quickly integrated it across its products.

CFRA Research viewed the earnings results as “largely in line” across Microsoft’s core businesses and believes the company is “incrementally improving” its AI revenue, according to senior equity analyst Angelo Zino. “Still, we acknowledge that the better-than-expected cloud results from Alphabet last week had investors looking for more,” Zino said.

Google Cloud Shined

In contrast, Google-parent Alphabet reported profits and revenue that exceeded expectations as its AI-enhanced cloud and search ad businesses thrived. Winning the big bet on AI is “crucial” for the group, said Jeremy Goldman of Emarketer, “but the market is willing to give them a level of patience.”

The AI frenzy has helped Microsoft’s cloud computing business grow in the double digits, a growth rate analysts suggest could be hard to sustain. Microsoft’s big stake in OpenAI, along with its own Copilot AI, helps it maintain a leadership position in AI, according to Emarketer senior analyst Gadjo Sevilla.

Revenue from Microsoft’s AI-infused “Intelligent Cloud” unit was $28.5 billion, a 19-percent increase from the same quarter a year earlier. Microsoft CEO Satya Nadella stated on an earnings call that use of its AI offerings is ramping up, from workplace software to Bing search and Copilot AI used by developers. “I’m energized about the opportunities ahead,” Nadella said. “We are investing for the long term in our fundamentals, in our innovation, and in our people.”

Microsoft’s Azure platform contributed to a strong increase in revenue from server products and cloud services. Nadella emphasized the company’s focus on meeting the mission-critical needs of its customers across its at-scale platforms today while also ensuring leadership in the AI era.

For its fiscal year, Microsoft reported a net income of $88.1 billion on revenue of $245.1 billion, up 22 percent and 16 percent, respectively. The Xbox video game unit saw a 61 percent increase in revenue, boosted by the acquisition of Activision. Microsoft also noted a 19 percent rise in costs to attract visitors to its search and news services as it competes with Google.