Microsoft posts double-digit Q1 earnings growth, but signals slowdown in cloud services

Microsoft posted double-digit progress in each income and earnings for the primary quarter, pushed by developments in AI built-in into its cloud providers, however its forecast for slower progress within the cloud enterprise dampened investor sentiment.

The tech agency’s shares declined by about 4% in after-hours buying and selling.

“We’re off to a strong begin to our fiscal yr, pushed by continued power of Microsoft Cloud,” Microsoft Chairman and Chief Government Officer Satya Nadella, mentioned in his opening remarks, in the course of the firm’s first-quarter earnings name.

Microsoft’s general cloud income for Q1 FY25 was $38.9 billion, up 22% year-over-year. Its monetary yr runs from July 1 to June 30, whereas different main tech corporations usually use the calendar yr.

The Home windows maker’s income elevated 16% year-on-year to $65.6 billion in Q1 FY25. Its internet revenue within the quarter surged to $24.7 billion, up 11% from the corresponding earlier interval.

Microsoft is a key participant within the cloud computing {industry}, competing with Amazon Internet Companies (AWS) and Google Cloud. In line with information from Synergy Analysis Group, their market shares had been 32%, 23%, and 12% respectively, as of Q2 2024.

In Q1 FY25, income progress (in fixed foreign money) from Azure cloud computing platform and different cloud providers was 34%, in contrast with 30% in corresponding quarter final yr. The corporate forecasted second-quarter Azure income progress of 31% to 32% in fixed foreign money in comparison with 31% reported within the year-ago interval.

“Demand continues to be increased than our obtainable capability,” mentioned Amy Hood, govt vp and chief monetary officer of Microsoft, in the course of the earnings name.

“In H2, we nonetheless count on Azure progress to speed up from H1 as our capital investments create a rise in obtainable AI capability to serve extra of the rising demand,” she added.

The CFO mentioned that the corporate’s capital expenditures within the first quarter was $20 billion. “We count on capital expenditures to extend on a sequential foundation, given our cloud and AI demand indicators,” she added, talking about Q2 outlook.

Tech giants like Microsoft, Google, and Meta have considerably elevated their capital expenditure (capex) to develop their server and information centre infrastructure, pushed by the exponential progress of AI and its demanding computational necessities.

Deal with AI

Microsoft, a serious investor in OpenAI, not too long ago solidified its partnership by considerably growing its funding. This transfer has catapulted the ChatGPT maker’s valuation to $157 billion.

Throughout the name, Nadella famous, “Our partnership with OpenAI additionally continues to ship outcomes. We now have an financial curiosity in an organization that has grown considerably in worth, and we’ve got constructed differentiated IP and are driving income momentum.”

“This quarter, we added assist for OpenAI’s latest mannequin household, o1. We’re additionally bringing industry-specific fashions by way of Azure AI,” he added.

Microsoft expects to incur a lack of roughly $1.5 billion within the second quarter as a consequence of its funding in OpenAI. Anticipated loss from OpenAI is accounted for underneath the fairness technique, as per Hood.

“We’re excited that solely 2.5 years in, our AI enterprise is on observe to surpass $10 billion of annual income run price in Q2. This would be the quickest enterprise in our historical past to succeed in this milestone,” she mentioned.

Enterprise segments

The Redmond-headquartered agency broadly categorises its income underneath three segments—productiveness and enterprise processes, clever cloud, and extra private computing.

Microsoft’s productiveness and enterprise processes clocked in $28.3 billion in income within the quarter, up 12% year-over-year. Income for clever cloud, which incorporates the Azure cloud computing platform, rose 20% to $24.1 billion within the September-ended quarter.

Extra Private Computing—which incorporates income from Home windows OEM, Units, Xbox content material and providers, Search and information promoting—was up 17% to $13.2 billion within the quarter.

Microsoft’s enterprise and employment-oriented on-line service LinkedIn’s income elevated 10%, barely forward of expectations with progress throughout all traces of enterprise.

Talking about LinkedIn’s enterprise, Nadella mentioned, “Member progress continues to speed up with markets in India and Brazil each rising at double digits.”

Gaming continues to be a key focus space for Microsoft, with the corporate making vital developments lately, together with the introduction of next-generation consoles and cloud gaming.

On October 13, 2023, Microsoft accomplished the acquisition of Activision Blizzard, the developer of Name of Obligation, marking its largest-ever and the gaming {industry}’s greatest deal.

“One yr since we closed our acquisition of Activision Blizzard King, we’re targeted on constructing a enterprise positioned for long-term progress, pushed by higher-margin content material and providers,” mentioned Nadella.