Azure’s Sluggish Performance Hinders AI Expansion for Microsoft

Shares of Microsoft Corp. in New York fell approximately 3% on Wednesday morning due to the company’s lackluster quarterly sales growth and a projected deceleration in its Azure cloud-services division. This overshadowed any positive sentiment regarding customer enthusiasm for their new artificial intelligence-driven products.

While overall results for the period ended June 30 beat analysts’ forecasts, Azure’s revenue growth slowed to 27 percent excluding currency effects from 31 percent in the previous quarter. The world’s biggest software maker predicted that Azure profits would continue to slow in the current quarter and said it would increase spending on expanding data centers for new cloud services — while it expected gradual growth in artificial intelligence revenue.

CEO Satya Nadella has announced a slew of new AI programs — based on models from partner OpenAI — across most of Microsoft’s major product lines, and demand has been strong for Internet-based services that allow customers to use OpenAI technologies. Still, the company’s Office productivity software, which includes artificial intelligence, is not yet widely available, and overall spending on Azure services and Office apps is declining after several years of increased corporate investment. The company’s weak Azure outlook dampens hopes that the new offerings would spark growth in a business that has fueled the company’s recovery for the past decade but has slowed in recent years.

“While Microsoft is better positioned than other cloud providers to monetize new AI investments, we believe it may take a few quarters for growth to kick in,” said Bloomberg Intelligence analyst Anurag Rana.

Shares fell to $340.16 at the market open. The stock gained 18% in the three months to June, outpacing the S&P 500’s 8.3% gain in that period. Microsoft shares hit a record high last week on expectations for new AI products.

Azure revenue growth for the first quarter of 2024, which ends in September, will be between 25 percent and 26 percent, excluding currency fluctuations, Microsoft CFO Amy Hood said on a conference call. In the same period a year earlier, Azure sales were up 42%, and they were up 48% in the first quarter of 2022.

Hood said Azure’s growth rate last season was at the top of his forecast, noting he was “pretty happy with that number.” It’s typical for customers to try to get the most out of the cloud-based products they’ve already bought, he said in an interview, but he expects less of an impact on Microsoft’s results in the coming quarters.

On the call, Nadella said Azure sales in 2023 represented more than half of the company’s $110 billion in cloud services, the first time Azure has reached that milestone. It also represents a gain of about $34 billion in Azure revenue in 2022 — a figure disclosed as part of a Federal Trade Commission lawsuit seeking to block Microsoft’s purchase of Activision Blizzard Inc.

The growth was fueled in part by Azure OpenAI, Microsoft’s cloud service for companies that want to use OpenAI’s artificial intelligence tools. The offer now has 11,000 customers, Nadella is on a conference call after the software maker’s fourth quarter earnings report. That’s up from the 4,500 that Microsoft announced in mid-May.

“I’m very encouraged by the pace of adoption of our AI tools,” Hood said in an interview.

Profit for the period ended June 30 was $2.69 a share and revenue rose 8% to $56.2 billion, the software maker said in a statement on Tuesday. According to a Bloomberg survey, analysts estimated an average of $2.56 a share in earnings and $55.5 billion in revenue in the last quarter of the fiscal year.

Annual sales growth slowed to 7 percent in 2023, the company said, after five consecutive years of more than 10 percent growth. Microsoft laid off 10,000 employees in the March quarter, including major businesses such as Azure and security software. The Redmond, Washington-based company made smaller layoffs in July in areas such as sales and support.

The company is increasing its spending on expanding data centers and buying the chips needed to run complex artificial intelligence systems. To leverage the large investments, Microsoft is introducing ways to monetize these products. earlier this month, the company set a price tag for Office AI tools called Microsoft 365 Copilot at $30 per month per user — on top of what most business customers already pay for the company’s productivity suite, which includes Word, Excel, email and conferencing software.

Microsoft has invested $13 billion in the startup OpenAI, a partnership that put the 48-year-old software maker at the forefront of the competition in building new applications that allow customers to create new content from their existing data as well as data collected from the web. Microsoft is revamping most of its products — including Office, Windows, Azure and Bing search — around OpenAI’s latest language model, GPT-4, and adding chatbot technology similar to the startup’s viral hit ChatGPT.

Microsoft’s sales of preinstalled Windows operating system software on PCs fell 12% in the June quarter, as global PC shipments fell 13%, according to market research firm IDC. While the industry decline was the sixth consecutive quarterly contraction in the market, overall sales were better than expected, IDC said. Microsoft’s Hood said there was some back-to-school PC sales in the June quarter, which helped bolster the results, but overall trends in the PC market are unchanged. The turnover of devices decreased by 20%.

Microsoft’s Xbox video game content and services revenue grew 5% in the quarter. The software maker’s $69 billion deal to buy game publisher Activision, which has been working through regulatory challenges, was originally expected to be completed by the end of June, but last week the companies extended their merger agreement to 18. until October to give Microsoft more time to clear the final hurdles.

In the past two weeks, momentum has shifted in favor of the deal, with the US Federal Trade Commission losing a bid to block it in court and Britain’s Competition and Markets Authority saying it would take the unprecedented step of restarting talks with companies to restructure the deal.

“We’re focused on working through the remaining regulatory bodies and working toward closure — that’s where our energy is,” Hood said.