Microsoft forecasts strong growth for Azure cloud business, shares surge 8%
Microsoft forecast on Wednesday stronger-than-expected quarterly growth for its cloud-computing business Azure after blowout results in the latest quarter, assuaging investor worries in an uncertain economy and lifting its shares 8 per cent after hours.
Microsoft's results, which follow similarly above-expectations outcomes from Google last week, could ease concerns about a potential slowdown in AI demand, after some analysts pointed to canceled data-center leases at Microsoft as a sign of excess capacity. Investors had also been worried about the fallout from sweeping U.S. tariffs that are prompting businesses to rein in spending.
Microsoft said revenue at its Azure cloud division rose 33 per cent in the third quarter ended March 31, exceeding estimates of 29.7 per cent, according to Visible Alpha. AI contributed 16 per centage points to the growth, up from 13 points in the previous quarter.
The company also forecast cloud-computing revenue growth of 34 per cent to 35 per cent on a constant currency basis for the fiscal fourth quarter, well above analyst estimates of 31.8 per cent, according to data from Visible Alpha. The company forecast revenue for its intelligent cloud segment between $28.75 billion and $29.05 billion, with the entire range above analyst estimates of $28.52 billion, according to LSEG data.
The company said its commercial bookings growth - which reflects new infrastructure and software contracts signed by business customers - was up 18 per cent in the fiscal third quarter, driven in part by a new Azure contract with ChatGPT creator OpenAI. Microsoft declined to comment on the size of the deal or what role it played in overall Azure sales growth.
"In a quarter clouded by tariff fears and AI spending scrutiny, this quarter is a clear win - even if it wasn't fireworks," said Jeremy Goldman, senior director of briefings at E-marketer.
"Azure and other cloud services beat Street expectations - and Microsoft Cloud's growth shows it continues to turn AI infrastructure into margin-friendly growth. Still, investors will be watching closely as the company continues to pull back on data center expansion."
In the third quarter, Microsoft's capital expenditures rose 52.9 per cent to $21.4 billion, less than estimates of $22.39 billion, according to Visible Alpha. However, the proportion of longer-lived asset expenditures fell to about half of the total.
Jonathan Neilson, Microsoft's vice president of investor relations, said that reflected a shift in Microsoft's spending from long-lived assets such as data center buildings toward more spending on shorter-lived assets such as chips.
"You plug in CPUs and GPUs, and then you can start recognizing revenue," Neilson said, referring to categories of chips made by Intel, Advanced Micro Devices and Nvidia, among others.
The Intelligent Cloud unit, which houses Azure, posted revenue of $26.8 billion, compared with expectations of $26.17 billion. Overall, revenue rose 13 per cent to $70.1 billion, beating estimates of $68.42 billion, according to data compiled by LSEG.
Redmond, Washington-based Microsoft reported a profit of $3.46 per share in the quarter, beating expectations of $3.22 per share.
The company also benefited from a 6 per cent increase in revenue at its more personal computing unit, which includes Xbox and its line of laptops.
Microsoft, which has also repeatedly said it is capacity constrained on AI, has been pouring billions into building its AI infrastructure and expanding its data-center footprint.
A senior Microsoft executive reiterated earlier this month that the company would spend $80 billion on its data center build-out this year, and investors will be watching closely to see if it reaffirms that on its post-earnings call.
A pullback in Big Tech's AI spending will have big implications for suppliers such as chip giant Nvidia, as well as the U.S. economy. J.P. Morgan analysts estimated in January that data-center spending could contribute between 10 and 20 basis points to U.S. economic growth in 2025-2026.
Neilson said inventory levels had already been high during the company's fiscal second quarter as retailers stocked up on computers and gaming consoles on tariff worries. That activity continued into the third quarter, he said.
"We expected in Q3 for them to bring inventory levels down to a more normal level. What we actually saw was inventory levels remained elevated," Neilson said. "There continues to be some uncertainty there."
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Business Times
11 hours ago
- Business Times
AI bets that fuelled Big Tech's surge now threaten rich profits
[NEW YORK] Some investors are questioning the amount of cash Big Tech is throwing at artificial intelligence, fuelling concerns for profit margins and the risk that depreciation expenses will drag stocks down before companies can see investments pay off. 'On a cash flow basis they've all stagnated because they're all collectively making massive bets on the future with all their capital,' said Jim Morrow, founder and chief executive officer at Callodine Capital Management. 'We focus a lot on balance sheets and cash flows, and so for us they have lost their historical attractive cash flow dynamics. They're just not there anymore.' Alphabet, Meta Platforms and Microsoft are projected to spend US$311 billion on capital expenses in their current fiscal years and US$337 billion in 2026, according to data compiled by Bloomberg. That includes a more than 60 per cent increase during the first quarter from the same period a year ago. Free cash flow, meanwhile, tumbled 23 per cent in the same period. 'There is a tsunami of depreciation coming,' said Morrow, who is steering clear of the stocks because he sees profits deteriorating without a corresponding jump in revenue. Much of the money is going towards things like semiconductors, servers and networking equipment that are critical for artificial intelligence computing. However, this gear loses its value much faster than other depreciating assets like real estate. Microsoft, Alphabet and Meta posted combined depreciation expenses of US$15.6 billion in the first quarter, up from US$11.4 billion a year ago. Add in Amazon, which has pumped more of its cash into capital spending in lieu of buybacks or dividends, and the number nearly doubles. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up 'People thought AI would be a monetisation machine early on, but that hasn't been the case,' said Rob Almeida, global investment strategist at MFS Investment Management. 'There's not as fast of AI uptake as people thought.' AI bounce Of course, investors still have a hearty appetite for the technology giants given their dominant market positions, strong balance sheets and profit growth that, while slowing, is still beating the rest of the S&P 500. This explains the strong performance of AI stocks recently. Since April 9, the day President Donald Trump paused his global tariffs and turned a stock market swoon into a boom, the biggest AI exchange-traded fund, the Global X Artificial Intelligence & Technology ETF, is up 34 per cent, while AI chipmaker Nvidia Corp. has soared 49 per cent. Meta has gained 38 per cent, and Microsoft has climbed 33 per cent – all topping the S&P 500's 21 per cent jump and the tech-heavy Nasdaq 100 Index's 28 per cent bounce. Just Tuesday, Bloomberg News reported that Meta leader Mark Zuckerberg is recruiting a secretive AI brain trust of researchers and engineers to help the company achieve 'artificial general intelligence,' meaning creating a machine that can perform as well as humans at many tasks. It's a monumental undertaking that will require a vast investment of capital. And in response Meta shares reversed Monday's decline and rose 1.2 per cent. But with more and more depreciating assets being loaded on the balance sheet, the drag on the bottom line will put increased pressure on the companies to show bigger returns on the investments. Dealing with depreciation This is why depreciation was a frequent theme in first-quarter earnings calls. Alphabet chief financial officer Anat Ashkenazi warned that the expenses would rise throughout the year, and said management is trying to offset the non-cash costs by streamlining its businesses. 'We're focusing on continuing to moderate the pace of compensation growth, looking at our real estate footprint, and again, the build-out and utilisation of our technical infrastructure across the business,' she said on Alphabet's April 24 earnings call. Other companies are taking similar steps. Earlier this year, Meta Platforms extended the useful life period of certain servers and networking assets to five and a half years, from the four-to-five years it previously used. The change resulted in a roughly US$695 million increase in net income, or 27 cents a share, in the first quarter, Meta said in a filing. Microsoft did the same in 2022, increasing the useful lives of server and networking equipment to six years from four. When executives were asked on the company's April 30 earnings call about whether increased efficiency might result in another extension, chief financial officer Amy Hood said such changes hinge more on software than hardware. 'We like to have a long history before we make any of those changes,' she said. 'We're focused on getting every bit of useful life we can, of course, out of assets.' Amazon, however, has taken the opposite approach. In February, the e-commerce and cloud computing company said the lifespan of similar equipment is growing shorter rather than longer and reduced useful life to five years from six. To Callodine's Morrow, the big risk is what happens if AI investments don't lead to a dramatic growth in revenue and profitability. That kind of market shock occurred in 2022, when a contraction in profits and rising interest rates sent technology stocks plummeting and dragged the S&P 500 lower. 'If it works out it will be fine,' said Morrow. 'If it doesn't work out there's a big earnings headwind coming.' BLOOMBERG
CNA
a day ago
- CNA
Exclusive-OpenAI taps Google in unprecedented cloud deal despite AI rivalry, sources say
SAN FRANCISCO :OpenAI plans to add Alphabet's Google cloud service to meet its growing needs for computing capacity, three sources told Reuters, marking a surprising collaboration between two prominent competitors in the artificial intelligence sector. The deal, which has been under discussion for a few months, was finalized in May, one of the sources added. It underscores how massive computing demands to train and deploy AI models are reshaping the competitive dynamics in AI, and marks OpenAI's latest move to diversify its compute sources beyond its major supporter Microsoft, including its high-profile Stargate data center project. It is a win for Google's cloud unit, which will supply additional computing capacity to OpenAI's existing infrastructure for training and running its AI models, sources said, who requested anonymity to discuss private matters. The move also comes as OpenAI's ChatGPT poses the biggest threat to Google's dominant search business in years, with Google executives recently saying that the AI race may not be winner-take-all. OpenAI, Google and Microsoft declined to comment. Since ChatGPT burst onto the scene in late 2022, OpenAI has dealt with increasing demand for computing capacity - known in the industry as compute - for training large language models, as well as for running inference, which involves processing information so people can use these models. OpenAI said on Monday that its annualized revenue run rate surged to $10 billion as of June, positioning the company to hit its full-year target amid booming adoption of AI. Earlier this year, OpenAI partnered with SoftBank and Oracle on the $500 billion Stargate infrastructure program, and signed deals worth billions with CoreWeave for more compute. It is on track this year to finalize the design of its first in-house chip that could reduce its dependency on external hardware providers, Reuters reported in February. The partnership with Google is the latest of several maneuvers made by OpenAI to reduce its dependency on Microsoft, whose Azure cloud service had served as the ChatGPT maker's exclusive data center infrastructure provider until January. Google and OpenAI discussed an arrangement for months but were previously blocked from signing a deal due to OpenAI's lock-in with Microsoft, a source told Reuters. Microsoft and OpenAI are also in negotiations to revise the terms of their multibillion-dollar investment, including the future equity stake Microsoft will hold in OpenAI. For Google, the deal comes as the tech giant is expanding external availability of its in-house chip known as tensor processing units, or TPUs, which were historically reserved for internal use. That helped Google win customers including Big Tech player Apple as well as startups like Anthropic and Safe Superintelligence, two OpenAI competitors launched by former OpenAI leaders. Google's addition of OpenAI to its customer list shows how the tech giant has capitalized on its in-house AI technology from hardware to software to accelerate the growth of its cloud business. Google Cloud, whose $43 billion of sales comprised 12 per cent of Alphabet's 2024 revenue, has positioned itself as a neutral arbiter of computing resources in an effort to outflank Amazon and Microsoft as the cloud provider of choice for a rising legion of AI startups whose heavy infrastructure demands generate costly bills. Alphabet faces market pressure to demonstrate financial returns on its AI-related capital expenditures, which are expected to hit $75 billion this year, while maintaining its bottom line against the threat of competing AI offerings, as well as antitrust enforcement. Google's DeepMind AI unit also competes directly with OpenAI and Anthropic in a race to develop the best models and integrate those advances into consumer applications. Selling computing power reduces Google's own supply of chips while bolstering capacity-constrained rivals. The OpenAI deal will further complicate how Alphabet CEO Sundar Pichai allocates the capacity between the competing interests of Google's enterprise and consumer business segments. Google already lacked sufficient capacity to meet its cloud customers' demands as of the last quarter, Chief Financial Officer Anat Ashkenazi told analysts in April. Although ChatGPT holds a large lead over Google's competing chatbot in terms of monthly users and analysts have predicted it could reduce Google's dominant search market share, Pichai has brushed aside concerns that OpenAI will usurp Google's business dominance.
Straits Times
2 days ago
- Straits Times
Academic publishers sign AI deals as Trump cuts research funding
Even for those who are steering clear of licensing deals for now, AI is unavoidable internally. PHOTO: PEXELS Academic publishers are rushing to sign licensing deals with artificial intelligence companies, carving out a new revenue stream as US research funding cuts dim their outlook. Informa Plc's Taylor & Francis signed a US$10 million deal with Microsoft Corp. last year to provide the tech giant access to part of its library to train large language models, or LLMs. Bloomsbury Publishing Plc is looking to 'monetise academic content through AI deals,' it said in its latest set of results, while John Wiley & Sons Inc. announced partnerships with Amazon Web Services and Perplexity earlier this year. The deals provide a boost to earnings for publishing giants. Informa sold US$75 million of non-recurring data access in 2024 through its partnership with Microsoft and another undisclosed partner, which helped to accelerate underlying revenue growth in the Taylor & Francis unit to 15 per cent from 3 per cent the year prior. Excluding AI deals, organic growth would have been closer to 3.5 per cent, according to Berenberg analyst William Larwood. This could offset some of the impact from the US administration's decision to cut federal spending on academic research, Mr Larwood said in a note last month. About 11 per cent of Taylor & Francis' subscription revenues could be at risk from US funding cuts in 2026, he calculated. A 43 per cent cut to the National Institutes of Health's budget for fiscal 2026 – what US President Donald Trump is pushing for – would result in a £33 million revenue headwind for Taylor & Francis. A less drastic cut of 25 per cent would mean shortfall closer to £19 million, Mr Larwood estimated. Even for those who are steering clear of licensing deals for now, AI is unavoidable internally. Springer Nature AG & Co KGaA, for instance, has not signed any licensing agreements so far, but is using AI to tighten workflows. 'It's not our first priority,' Chief Executive Officer Frank Vrancken Peeters said on the most recent earnings call. 'The main emphasis in terms of AI for us has been transforming the publication process, making it faster, more researcher-friendly and more reliable in terms of research integrity,' Springer Nature said in an emailed response to questions. The recent flurry of licensing deals in the academic world is part of a broader trend of publishers both fighting against and joining forces with powerful AI companies. The New York Times Co. recently reached a deal to license its editorial content to Inc. for use across its artificial intelligence platforms, after years of battles in court with OpenAI and its partner Microsoft over copyright infringement. The Atlantic and Vox Media signed similar deals, as publishers try to prevent tech companies from scraping the web to train chatbots without providing fair compensation. 'Licensing deals could be the most straightforward path to resolving copyright disputes between the developers of large language models and the owners of the content upon which those models were trained,' wrote Ms Tamlin Bason, a legal analyst at Bloomberg Intelligence. Compensation remains a key point of contention in academic publishers' AI deals. Some authors whose work was licensed out said they were not given the opportunity to opt out of the partnership and were not appropriately compensated. Microsoft offered HarperCollins US$5,000 per title, split 50/50 with the author. There's no ballpark in terms of what writers can expect, according to Ms Mary Rasenberger, the CEO of the Authors Guild, whose position is that authors should be asked for permission and given 75 per cent to 85 per cent of the revenue from the AI deal. An author was recently paid just US$97 by Taylor & Francis to give over a book for LLM training, she told Bloomberg. 'Proceeds from these partnerships are being shared with authors and other rights holders in accordance with the licensing terms and royalty statement periods in their contracts,' a spokesperson for Taylor & Francis said. 'Academic authors don't have expectations of making that much money from their books,' Ms Rasenberger said. 'It's more that they don't want to lose control over their work.' Beyond souring relationships with their authors, the bigger concern for publishers is becoming obsolete in a world of AI-generated content. 'It's definitely a risk, without a doubt,' Bloomberg Intelligence analyst John Davies said. The key question is 'how can you give certainty to your authors and your shareholders that you've not chucked the baby out with the bath water,' he added. Publishers' experience with selling rights to their data should be key in implementing the appropriate guardrails, Mr Davies said. Taylor & Francis has negotiated clear rules around display rights, repurposing and contiguous word count – verbatim extracts of more than a set amount of words – CEO Stephen Carter said in an earnings call last year. Berenberg's Mr Larwood isn't too worried either, pointing to the intellectual property rights embedded in the Taylor & Francis agreements. 'This suggests that it will look to sign more contracts in the future, providing upside to estimates,' he said. BLOOMBERG Join ST's Telegram channel and get the latest breaking news delivered to you.
