Microsoft Corp. shares fell 3% in after-hours trading as cloud computing revenue slightly undershot analysts’ estimates.

Consistent with Alphabet Inc.’s announcement last week that it was sharply increasing its investments in cloud infrastructure to support artificial intelligence, Microsoft said it spent $13.9 billion to build out data centers and computing infrastructure for AI processing, up 55% from the same quarter last year.

The company said the increased expenditures were merited by higher AI-driven revenue, with demand continuing to outstrip supply. Cloud revenue increased 21%, while overall revenue rose 15%. Sales in the intelligent cloud segment rose 19% to $28.52 billion, with Azure revenue growing 29%. However, the figure was slightly below the $28.72 billion analysts had expected.

European business soft

Chief Financial Officer Amy Hood attributed the cloud segment’s slight underperformance to “softness in a few European geographics on non-AI consumption.” She said the company expects that trend to continue into the first half of fiscal 2025.

Earnings per share rose 9%, to $2.95, from $2.69 a year ago and beat the consensus estimate of $2.93. Total revenue rose 16% in constant currency terms, to $64.73 billion, slightly ahead of expectations of $64.44 billion. view. Net income in the quarter rose 10%, to $22 billion.

“We are building out the application server infrastructure for the AI wave,” said Chief Executive Satya Nadella (pictured). He reeled off a list of related growth statistics, including 60% growth in the number of Azure AI customers to 60,000 and 50% growth in the number of AI customers who also use Microsoft analytics tools.

GitHub is on a $2 billion run rate, up 40% year-over-year and over 480,000 organizations have used Microsoft’s in-platform AI capabilities. The number of people using a Microsoft copilot doubled quarter-over-quarter, Nadella said.

Deceptive strength

Nucleus Research Inc. Senior Analyst Alexander Wurm said he believes Azure performance was stronger than the numbers indicate. Among software-as-a-service companies that account for a significant share of cloud spending, “We’re seeing an emphasis on the efficiency of the workloads running on Azure,” he said. “The number is growing but the cost per workload is going down or remaining stagnant.” That masks actual growth in Azure use.

Wurm noted comments by Microsoft executives that demand for Azure services was greater than capacity and that AI computing capacity is still constrained. “As long as that is the case they’ll continue to increase their capital expenditures,” he said. Hood told analysts to expect 28% to 29% growth in Azure the next fiscal quarter.

Hood noted that commercial bookings were up 17%, which was “well ahead of expectations.” Commercial remaining performance obligations increased 21% to $269 billion and cash flow from operations of $119 billion exceeded $100 billion for the first time.

AI growth on deck

Wurm said he expects customer spending on AI to accelerate as early tests move into the production stage.

“We’re seeing two main AI use cases: internal projects to make the workforce more productive and external cases delivering services with AI,” he said. “Those external use cases take time to catch on. I took away from executives’ remarks that they expect the second half to be the turnaround on external uses,” with AI revenues likely accelerating as a result.

On a segment basis, productivity and business processes sales grew 11%, to $20.32 billion, on gains in Office 365 commercial and LinkedIn. The “more personal computing” segment grew 15%, to $15.9 billion, on stronger Windows and Xbox sales.

Revenue in Productivity and Business Processes grew 12% in constant currency, to $20.3 billion, with Office Commercial products and cloud services revenue up 13%. Dynamics products and cloud services revenue increased 16% on Dynamics 365 revenue growth of 20%.

For the fiscal year ended June 30 total revenue was $245.1, up 15% and operating income was of $109.4 billion was up 21%. Net income of $88.1 billion grew 20%.

Photo: Microsoft on X