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Dow Jones NewsJan 30, 12:54 AM UTC
DJ Microsoft's Cloud Computing Business Experienced Slower Growth -- 3rd Update
By Tom Dotan
Microsoft's flagship cloud computing business experienced a slowdown in growth last quarter, as constraints on data center supply once again weighed down results
Revenue for tech giant's Azure cloud computing division, which is closely watched by investors, grew 31%, at the low end of the company's projections. Chief Financial Officer Amy Hood said Azure growth would again be 31% or 32% this quarter, a projection that disappointed investors. Microsoft stock was down 4.5% in after-hours trading.
Just two days after tech stocks dropped due to investor fears sparked by the rapid success of DeepSeek, an inexpensive and free-to-use AI model built in China, Microsoft Chief Executive Satya Nadella emphasized that his company is seeing its own efficiency gains in the AI models it builds and operates.
"In some sense, what's happening with AI is no different than what was happening with the regular compute cycle," he said on a call with analysts, referring to cost declines for other chip-based technology in the past.
Nadella praised DeepSeek's innovations and said the techniques it used will "all get commoditized" and be broadly used in the industry, which will benefit Microsoft's cloud computing and PC businesses. "AI will be much more ubiquitous," he said. "This is all good news as far as I'm concerned.
Microsoft began offering DeepSeek's new R1 AI model on Azure Wednesday.
The CEO didn't address OpenAI's contention that DeepSeek might have improperly benefited from its AI models using a process called distillation. Microsoft is OpenAI's biggest investor and hosts its applications on Azure.
Nadella was also asked by analysts about his company's revised partnership with OpenAI, which allows it to work with other cloud providers, and the Stargate joint venture the ChatGPT maker announced with SoftBank and other partners to spend up to $500 billion on AI infrastructure.
He said Microsoft and OpenAI will continue to work closely together but that his company's investment in data centers doesn't rely on OpenAI's business. "The overall point, the thing I'd say, is we are building a pretty fungible fleet," he said.
Microsoft's capital expenditures including leases, most of which go toward building AI data centers, totaled $22.6 billion last quarter, up from $20 billion in the September quarter. Microsoft previously said it plans to spend $80 billion on capital in the current fiscal year ending in June, with most going to AI infrastructure. Last fiscal year it spent $55.7 billion.
The company said revenue from its AI businesses is now more than $13 billion when extrapolated annually. AI services contributed 13 percentage points of Azure's revenue growth. That figure was 12 points in the prior quarter.
Total revenue rose 12% to $69.6 billion last quarter and net income was up 10% to $24.1 billion.
The company projected revenue in the current quarter will be between $67.7 billion and $68.7 billion.
Executives noted that cloud AI revenue was actually stronger than expected, but the overall cloud business was weighed down by trouble delivering for traditional, non-AI cloud customers. Hood said she expects that capacity constraints, which it experienced in its September quarter, will be resolved by the end of the fiscal year.
In addition to selling cloud computing to OpenAI and other developers, Microsoft has been investing in its Copilot AI assistant for businesses and consumers, for which it doesn't break out revenue.
Over the past year, Microsoft has been aggressively marketing Copilot, which helps write work documents and summarize video calls, as an add-on to software bundles like Microsoft 365. In the past few months, the company began automatically bundling it with the consumer version of M365 while raising the base rate. It also recently rolled out an AI tool called Copilot Chat to the enterprise versions of M365. Microsoft hopes the pay-as-you-go application will entice businesses to sign up for an unlimited subscription version that costs $30 monthly for each user.
Hood partly credited growth in Copilot usage with the company's better-than-expected AI cloud revenue growth.
Write to Tom Dotan at tom.dotan@wsj.com
(END) Dow Jones Newswires
January 29, 2025 19:54 ET (00:54 GMT)
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