Key Points
- Microsoft plans to increase spending on AI infrastructure despite slower cloud business growth.
- Capital spending rose 77.6% to $19 billion in Q4, totaling $55.7 billion for fiscal 2024.
- Shares fell 7% but later recovered to a 4% decline following forecasts of accelerated Azure growth in H2 FY2025.
- Azure forecasted to grow 28%-29% in Q1 FY2025, slightly below expectations, with a 29% rise in Q4 FY2024.
Microsoft announced plans to increase spending on AI infrastructure in the current fiscal year, despite slower growth in its cloud business, indicating that the return on these substantial investments may take longer than Wall Street anticipated. The announcement led to a 7% drop in Microsoft shares, which later recovered to a 4% decline in after-hours trading on Tuesday. This recovery followed Microsoft’s statement during a post-earnings call that Azure cloud growth will accelerate in the latter half of fiscal 2025.
The tech giant has been investing billions into data centers to leverage the generative AI boom, mirroring actions by other major tech companies. Last week, Google’s parent company, Alphabet, indicated that its capital expenditures would remain high for the rest of the year. Microsoft’s capital spending soared 77.6% to $19 billion in its fiscal fourth quarter, ending June 30, with most of this expenditure directed towards cloud and AI-related projects. For fiscal 2024, Microsoft’s capital spending reached $55.7 billion.
Microsoft’s CFO, Amy Hood, justified the spending, emphasizing the need to support the growing demand for AI services and noting that the investments are expected to generate returns over 15 years or more. However, investors, who have boosted Microsoft’s stock by nearly 25% over the past year due to AI optimism, were disheartened by the slower-than-expected growth in Azure.
For the July-September quarter, Microsoft forecasted Azure growth of 28% to 29% on a constant currency basis, slightly below the 29.7% expected by analysts. It follows a 29% increase in the quarter ending June 30, which also fell short of the 30.6% estimate and marked a slowdown from the previous quarter. Daniel Morgan, senior portfolio manager at Synovus Trust, remarked on investors’ impatience, noting that they expect immediate revenue increases corresponding to the billions spent.
While overall Azure growth decelerated, AI services contributed more significantly to revenue growth in the June quarter, accounting for eight percentage points, up from 7 in the previous quarter. Microsoft does not disclose absolute revenue figures for Azure, the division best positioned to benefit from AI interest.
CEO Satya Nadella highlighted that Azure AI usage had grown to over 60,000 customers, nearly a 60% year-on-year increase, with the average spend per customer continuing to rise. Nadella has integrated AI across Microsoft’s product range, from Bing to Word, largely utilizing technology from OpenAI, in which Microsoft has invested about $13 billion.
The productivity segment, including Office apps, LinkedIn, and 365 Copilot, grew 11%, surpassing expectations of 10%. Revenue from the Intelligent Cloud unit, encompassing Azure, rose 19% to $28.5 billion, slightly below analysts’ estimates of $28.68 billion. Microsoft’s total revenue increased by 15% to $64.7 billion in the fourth quarter, exceeding analysts’ expectations of $64.39 billion. The personal computing division also saw a 14% revenue increase, benefiting from stabilizing PC sales.
