(Bloomberg) -- Microsoft Corporation posted its strongest revenue growth since 2022, spurred by interest in new artificial intelligence products that in turn are driving renewed spending on cloud computing.
Revenue in the second quarter, which ended December 31, rose 18% to $62 billion, while profit was $2.93 a share, the company said in a statement Tuesday. Analysts polled by Bloomberg on average estimated per-share earnings of $2.78 on sales of $61.1 billion.
Azure cloud-services sales gained 30%, compared with 29% growth in the previous quarter. That exceeded the 28% growth analysts projected.
Chief Executive Officer Satya Nadella has pledged to turn Microsoft into an artificial intelligence powerhouse by partnering with leading startup OpenAI. Those efforts got a boost during the quarter thanks to the release of AI-infused Office software for businesses. Cloud services enabling corporate customers to build their own AI applications on OpenAI’s technology also fueled demand for Azure. Still, some investors may have been looking for a bigger jump in the cloud division, given all the enthusiasm for the new tools and Microsoft’s focus on pushing them to customers. Shares were little changed in extended trading following the report.
“On the software side, everyone is trying to play catch up to Microsoft,” said Dan Morgan, a senior portfolio manager at Synovus Trust Company. “The cloud data center is the hottest space for AI and the only spot we can see a real uptick in terms of AI. But it’s not enough to offset secular trends – we’re not back up to 50 to 60% growth in Azure.”
Microsoft’s shares slipped as low as $401.50 in late trading, then recovered some of the decline. They closed at $408.59 in New York. The stock rose 19% in the last three months of 2023, compared with an 11% rise for the S&P 500 Index. Optimism for Microsoft’s AI prospects has sent its market capitalization above $3 trillion, passing Apple Inc. as the world’s most valuable company.
Commercial cloud product revenue rose 24% to $33.7 billion, Microsoft said in a slide presentation on its website. The company on November 1 widely released the corporate version of its Microsoft 365 Copilot – an AI assistant for Office programs like Outlook, Word, PowerPoint, and Teams – to large customers. This month, Microsoft expanded access to smaller firms and released a $20 consumer version. The new tools cost companies an extra $30 a month on top of their existing subscriptions, and could one day become a meaningful source of recurrent revenue.
Microsoft’s Azure growth rate was boosted 6% by demand for AI services, Chief Financial Officer Amy Hood said. Interest in AI products will also lead customers to spend more with Microsoft on basic services like storage and computing power, she said.
“We want to be the place where people can most confidently come to run AI model,” Hood said in an interview. Microsoft’s Office cloud service for business users also topped 400 million paid customers in the quarter, she said.
Sales in the More Personal Computing unit rose to $16.9 billion, slightly topping the average analyst projection. Global personal computer sales rose 0.3% in the quarter, according to market research firm Gartner Inc., the first increase in two years and a sign that demand is stabilizing.
Xbox content and services revenue jumped 61%, the first quarterly result that included Activision Blizzard Inc., acquired in October to bolster the Xbox business. Last week, the company cut 1,900 jobs across the game division, many of them at Activision Blizzard. On Monday, Xbox named a new president for the Blizzard unit, Johanna Faries, as Microsoft tries to integrate the acquired businesses and jump-start growth in gaming revenue.
The Redmond, Washington-based company has invested $13 billion in startup OpenAI, a partnership that vaulted the 48-year-old software maker to the forefront of a race to build new applications that let customers generate fresh content from their own data and information scraped from the web. The partnership underwent a brief period of drama in November when OpenAI’s board ousted co-founder and key Nadella ally Sam Altman, then returned him to his leadership role at the company a few days later – after Microsoft offered to hire him instead.
While the management turmoil grabbed attention, it probably didn’t hurt Microsoft’s AI revenue much, if at all, Jefferies analyst Brent Thill wrote in a note to clients. Still, investors are waiting for Microsoft to provide hard data and forecasts on how and when AI will offer a meaningful contribution to the bottom line.
