Microsoft Earnings Report Summary

Authors: Deborah Mary Sophia, Aditya Soni, and Anna Tong

Microsoft has forecasted higher spending on AI this quarter but lower growth in its Azure cloud business, indicating that substantial AI investments aren't sufficient to resolve data center capacity constraints.

Shares in Microsoft fell 3.6% in after-market trading, despite beating Wall Street estimates for first-quarter revenue and profit. In a similar vein, Meta Platforms reported results that exceeded expectations but alerted investors about a significant rise in AI-related infrastructure expenses, causing its stock to drop 3.1% after-market as well.

Brett Iversen, Microsoft's VP of Investor Relations, stated that capacity constraints in the AI sector would not be addressed until the second half of the fiscal year. Azure's revenue growth for the second quarter is forecasted at 31% to 32%, slightly below the analysts' average expectation of 32.25%. For the fiscal first quarter, Azure revenue rose 33%, aided by a 12-point contribution from AI, compared to 11 points from the previous quarter.

Microsoft has invested billions to build its AI infrastructure, and capital expenditures increased by 5.3% to $20 billion, exceeding analysts' expectations of $19.23 billion. There are concerns among investors over this spending, especially since Microsoft's growth has lagged behind competitors like Meta and Amazon; it has gained just over 15% this year.

Analysts predict Microsoft will spend over $80 billion in this fiscal year, up more than $30 billion from last year, which might create constraints on free cash flow and margins, according to Gil Luria, head of Technology Research at D.A. Davidson. In contrast, Google has benefited from AI developments, reporting a 35% growth in its cloud business.

The quarterly earnings reflect Microsoft’s restructured reporting system, making quarter performance harder to gauge. Microsoft reported earnings of $3.30 per share against the average analyst estimate of $3.10, and revenue increased by 16% to $65.6 billion, outpacing predictions. Microsoft's strong position in the AI arena is bolstered by its partnership with OpenAI, granting Azure customers access to advanced AI models capable of solving complex tasks.

In addition, Microsoft gained early access to infuse OpenAI technology into its product offerings like Bing and applications such as Excel and PowerPoint, although the results have not met expectations. Revenue from Microsoft's productivity business reached $28.3 billion, while the personal-computing segment, which includes Windows and Xbox products, reported a 17% increase in revenue to $13.2 billion.