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Business News/ Companies / Microsoft lays out an aggressive spending plan to serve AI demand

Microsoft lays out an aggressive spending plan to serve AI demand

Microsoft plans to increase its spending on AI services, including the establishment of new data centers, after beating Wall Street's expectations for Q4 revenue and profit. The company aims to meet the growing demand for its AI offerings and is strategically integrating AI into its products.

Microsoft lays out an aggressive spending plan to serve AI demandPremium
Microsoft lays out an aggressive spending plan to serve AI demand

In a bid to meet the soaring demand for its new artificial intelligence services, Microsoft revealed an ambitious spending plan after outperforming Wall Street's expectations for fourth-quarter revenue and profit. The company's expenses escalated due to the establishment of new data centers to bolster its AI capabilities. Chief Financial Officer Amy Hood indicated during a conference that capital expenditures would keep rising every quarter until fiscal year 2024. Shares fell about 4% in after-hours trade.

Investors and analysts are closely observing the potential benefits of generative AI services for Microsoft, particularly in light of their early lead through investments in OpenAI, which owns the popular ChatGPT service. 

Microsoft has been strategically integrating AI into its products, like the "Copilot" assistant, priced at $30 per month, which efficiently summarizes daily emails for Microsoft 365 users. Additionally, the company aims to offer cloud computing services to other firms, facilitating the development of their own AI services.

While its Azure sales growth slightly exceeded market expectations, Microsoft's quarterly capital expenditures hit the highest single-quarter total since at least its fiscal 2016. The company is battling other cloud providers for a limited supply of chips from Nvidia Corp, whose graphics processing units are essential for creating AI products and services.

CFO Hood told analysts that despite Microsoft's increased spending in fiscal 2024, operating profit margins would grow slightly after adjusting for the effects of an accounting rule change. "The real focus here is being able to be aggressive in meeting the demand curve," Hood said.

It will take time to make money, Hood said, noting that Copilot is not ready for general release and any revenues from the product are likely to happen toward the second half of fiscal 2024.

Microsoft forecast Azure revenue growth of 25%-26% in constant currency for the fiscal first quarter, compared with an estimate of 25.6% from Visible Alpha that does not adjust for foreign exchange rates.

For the segment that includes Azure, Microsoft forecast a first-quarter revenue range with a midpoint of $23.45 billion. Analysts on average estimated $23.55 billion, according to Refinitiv data.

The midpoint of its first-quarter forecast for the segment containing Office was $18.15 billion, compared with analysts' consensus estimate of $18.08 billion.

Microsoft's forecast for its Windows segment had a midpoint of $12.7 billion, below analysts' estimate of $13.14 billion.

Revenue in the fiscal fourth quarter ended June 30 rose to $56.2 billion, beating the consensus estimate of $55.5 billion according to Refinitiv. Net income was $2.69 per share, above the $2.55 average estimate.

Microsoft's Intelligent Cloud unit, which houses the Azure cloud computing platform, increased its revenue to $24 billion slightly topped expectations according to Refinitiv data.

Azure revenue rose 26%, beating a 25.2% growth estimate from Visible Alpha.

Microsoft does not break out a precise quarterly revenue figure for Azure, the part of its business best situated to capitalize on booming interest in AI. But Chief Executive Satya Nadella said on a conference call that Azure accounted for more than half of the $110 billion for "Microsoft Cloud" in fiscal 2023, putting Azure sales at $55 billion or more and revealing the size of the business for the first time.

The company is still navigating a PC business slump with sales, including of its Windows operating system, falling to $13.9 billion. The segment with the LinkedIn social network and its Office productivity software increased sales to $18.3 billion. Both segments slightly topped the average analyst estimate, according to Refinitiv data.

Capital expenditures jumped to $10.7 billion from $7.8 billion in the fiscal third quarter, after the company told investors spending would rise as it builds out data centers for AI work.

Microsoft has started integrating AI functionality across its products such as Azure, Microsoft 365, GitHub and several developer tools.

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Published: 26 Jul 2023, 06:54 AM IST
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