Microsoft Surpasses Sales Expectations in Anticipation of AI Deployment

In its fiscal first quarter, Microsoft outperformed Wall Street expectations across all segments, with its cloud computing and PC divisions experiencing sales, largely driven by the anticipation of using its artificial intelligence (AI) offerings.

Microsoft, a strong supporter and collaborator with OpenAI, is yet to fully launch most products resulting from its partnership with the creator of ChatGPT. Nevertheless, there’s considerable enthusiasm among corporate technology buyers for features like email summarization and swift code completion, which contributed to the company’s revenue surging by 13% to $56.5 billion in the quarter ending on September 30. This surpassed analysts’ consensus estimate of $54.52 billion, according to LSEG data.

Jesse Cohen, a senior analyst at Investing.com, noted, “The results indicated that artificial intelligence products are stimulating sales and already contributing to top and bottom-line growth.”

Microsoft Surpasses Sales Expectations in Anticipation of AI Deployment

Revenue from Microsoft’s Intelligent Cloud unit, which houses the Azure cloud-computing platform where much of the AI work is conducted, reached $24.3 billion, surpassing analysts’ estimate of $23.49 billion, as indicated by LSEG data. Azure revenue also showed robust growth at 29%, exceeding the 26.2% growth estimate from market research firm Visible Alpha.

Brett Iversen, Microsoft’s vice president for investor relations, explained that much of the quarterly sales growth stemmed from customers re-engaging with Microsoft’s cloud services in anticipation of utilizing AI services.

Comparatively, Google-parent Alphabet’s cloud division missed its third-quarter revenue estimates due to economic uncertainties and high-interest rates causing budget cuts among its customers.

Bob O’Donnell, chief analyst at TECHnalysis Research, commented, “While a single quarter doesn’t determine a major trend, this quarter’s cloud results from Microsoft and Google suggest that Azure is gaining market share against its competitors. Microsoft’s strong messaging on their AI technology is getting companies to consider them more seriously.”

Microsoft reported a fiscal first-quarter profit of $2.99 per share, surpassing analyst estimates of $2.65 per share, according to LSEG data.

Jeremy Goldman of research firm Insider Intelligence noted, “There are some weaker areas; search advertising revenues, for one, are growing slower than most segments.”

After the earnings report, Microsoft’s shares surged by 4.2% in after-hours trading.

Microsoft stated that search and news advertising revenue, excluding traffic acquisition costs, increased by 10%, without providing a specific revenue figure.

Microsoft has been integrating AI into its products, such as the $30-a-month “Copilot” for its Microsoft 365 service, which can summarize a day’s worth of emails into a brief update. Although this tool is currently available to a limited number of pilot customers, it will require businesses to make several upgrades to their Microsoft-based systems when it becomes widely accessible next month.

Investors are also monitoring Microsoft’s spending on massive data centres to support AI software. The company disclosed that fiscal first-quarter capital expenditures were $11.2 billion, up from $10.7 billion in the previous quarter, marking the largest expenditure since at least fiscal 2016. Microsoft executives expect this figure to increase each quarter this fiscal year, potentially exceeding $44 billion.

Sales of its Windows operating system and other products in the segment reached $13.7 billion, surpassing analysts’ consensus estimate of $12.82 billion, according to data from LSEG.

The segment containing the LinkedIn social network and office productivity software grew to $18.6 billion, exceeding analysts’ consensus estimate of $18.20 billion, as indicated by LSEG data.

See Also: Microsoft-Affiliated Research Finds Flaws in OpenAI’s GPT-4