Microsoft Corp.'s cloud business reported growth that narrowly surpassed analysts' estimates, failing to reassure investors who worry the company is not fully capitalizing on the surge in demand for artificial intelligence services.
Azure Performance Falls Short of Expectations
The Azure unit posted a 39% revenue gain during the fiscal third quarter when adjusted for currency fluctuations, the company announced Wednesday in a statement. This result barely exceeded the average analyst estimate of 38% growth. While 20 million customers are now paying for Copilot, Microsoft's flagship AI application, up from 15 million in the prior quarter, the figures did not impress the market.
Capital Expenditures Below Estimates
Capital expenditures, a key metric for data center spending, reached US$31.9 billion in the quarter, falling short of the average analyst estimate of US$35.3 billion, which includes leases. This suggests that Microsoft is struggling to bring data center capacity online quickly enough to meet customer demand.
The world's largest software maker is heavily focused on commercializing artificial intelligence through its cloud services and applications like Copilot. However, the company has faced challenges in scaling its infrastructure to fully capitalize on the opportunity.
Stock Decline and Analyst Concerns
Microsoft's shares dipped in extended trading following the announcement. The stock had already declined about 12% this year through Wednesday's close. Jefferies analyst Brent Thill noted ahead of earnings that the decline is primarily due to concerns about weak adoption of Copilot and the durability of Microsoft's Office software business.
In a statement, chief executive Satya Nadella highlighted that the company's AI business had surpassed an annual revenue run rate of US$37 billion, more than doubling compared to the prior year. Despite this growth, investors remain cautious.
Shift in Copilot Strategy
Last quarter, Microsoft faced a chilly reception from Wall Street after revealing that only about 3% of its corporate user base were paying for Copilot. Since then, the company has shifted its focus from free adoption to driving sales of the tool.
The results underscore the challenges Microsoft faces in convincing investors that its substantial investments in AI will yield significant returns. While the cloud business continues to grow, the pace has not been enough to alleviate concerns about the company's ability to monetize AI effectively.
