Microsoft's strong cloud demand drives profit and sales growth above estimates

Bloomberg | | Posted by Singh Rahul Sunilkumar
Apr 26, 2023 02:28 PM IST

Microsoft said it will step up spending to bolster its cloud-data centres to meet customer demand for new AI tools, while keeping operating expenses in check.

Microsoft Corp. reported quarterly profit and sales that topped projections, fuelled by resilient corporate cloud-computing demand, and gave an upbeat outlook for its nascent artificial intelligence services. Shares jumped more than 8% in late trading. (ALSO READ: Microsoft profits up 9% in Q3 as company rides AI wave)

A Microsoft logo is seen on an office building in New York City, US. (REUTERS/ FILE)
A Microsoft logo is seen on an office building in New York City, US. (REUTERS/ FILE)

The software maker said it will step up spending to bolster its cloud-data centres to meet customer demand for new AI tools, while keeping operating expenses in check. Microsoft has unveiled a procession of AI-based products and features in recent months, including a new internet search chatbot based on OpenAI’s technology.

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“We are committed to leading the AI platform wave and making the investments to support it,” Chief Financial Officer Amy Hood said, noting that the company will spend enough on infrastructure to support systems for itself, for partner OpenAI and other customers.

ALSO READ: Microsoft to put ChatGPT AI model in Bing search engine to challenge Google

In the fiscal third quarter, which ended in March, profit was $2.45 a share, and sales rose 7.1% to $52.9 billion, the software maker said in a statement Tuesday. That compared with analysts’ average estimate for $2.24 a share in earnings and $51 billion in revenue, according to a Bloomberg survey.

In Microsoft’s closely watched Azure cloud-computing business, revenue climbed 31% excluding the impact of currency fluctuations, matching predictions. Sales from commercial cloud products like Azure and Office productivity software rose 22% to $28.5 billion, the company said.

Though total sales growth has decelerated to single digits after five years of more robust gains, Microsoft’s products like Azure and Office 365 cloud-based offerings continued to attract customers even as many scaled back spending in a shaky economy. To help weather the broader slowdown, Microsoft fired 10,000 workers this year, including in key businesses like Azure and security software.

“A solid report on a low-bar quarter,” said Dan Morgan, senior portfolio manager at Synovus Trust Co., noting that the company’s tepid projections in January for this quarter had tamped down expectations.

The Redmond, Washington-based company has also kept clients’ attention as Chief Executive Officer Satya Nadella turned to massive bets in artificial intelligence, including a reported $10 billion of new investment into OpenAI and a new Bing internet search chatbot — a strategy to juice future sales of Azure, search ads and office-productivity programs.

The company’s shares jumped as high as $302 in extended trading following the report and comments on AI, after closing at $275.42 in New York. The stock gained 20% in the quarter on optimism for Microsoft’s new AI plans and products, compared with a 7% rise in the Standard & Poor’s 500 Index.

Microsoft’s Azure OpenAI service, the cloud offering that enables use of OpenAI products, saw customers jump 10-fold from the prior quarter to 2,500, Nadella told analysts on a conference call. The GitHub unit for software developers introduced its AI Copilot code-generating tool for businesses three months ago and has seen 10,000 organizations sign up, he said.

In the recent quarter, the company leveraged its investment and partnership with OpenAI to unveil an overhauled version of its Bing search engine enhanced with AI chat, seeking to mount a real challenge to market leader Google. Any gains in the search business could generate billions in future revenue, Microsoft told analysts when it unveiled the product.

Google parent Alphabet Inc. also reported quarterly earnings on Tuesday, saying that search advertising performed well even as its flagship search business faces heightened competitive threats from Microsoft and OpenAI.

Microsoft has also retooled its Office, accounting and security software to add AI features. AI products, particularly those for Bing and Office, were introduced in recent weeks, and aren’t yet adding much to sales, but the company is seeing promising initial signs in terms of usage and customer demand, Hood said.

Nadella said Bing took share in the US search market, without offering specific metrics. Bing has more than 100 million daily active users, and mobile Bing app installations have quadrupled since the launch of the AI-powered Bing in February, he said. According to researcher Statcounter, Bing had less than 3% of the global internet search engine market as of March.

“We look forward to continuing this journey in what is a generational shift in the largest software category — search,” Nadella said on the call.

Overall Azure demand was fuelled by deal renewals and, in an improvement from the previous quarter, Microsoft was better able to convince customers to add new products to their contracts when they re-signed, Hood said in an interview. That included security software and the Teams conferencing tool, she said. For the fiscal fourth quarter, Hood forecast Azure growth of 26% or 27% excluding currency impacts.

Even though the global PC market is plunging, parts of Microsoft’s More Personal Computing unit — including Windows for commercial PCs, video games and advertising — performed better than the company had forecast, Hood said. The unit’s sales were $13.3 billion, down 9% from a year earlier but higher than the $12.2 billion average estimate of analysts polled by Bloomberg.

“This environment continues to be dynamic,” Hood said.

Microsoft is also awaiting clearance for its $69 billion acquisition of Activision Blizzard Inc., with US regulators challenging the deal in court and UK antitrust officials set to release an update this week on their requirements for Microsoft to address competition concerns.

Azure, which competes with Amazon and Google, has been Microsoft’s highest-profile business for years, viewed as its strongest growth engine and the basis for its restoration to the ranks of technology giants over the past decade.

Now, even with the burgeoning AI business attracting more investor attention, that fanfare will keep the focus on Azure results in the coming quarters. Microsoft sells many of its AI services through Azure — and integrating these products, as well as OpenAI’s systems, involves intense usage of Azure computing power.

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