Microsoft set to spend more than $13bn on AI and cloud datacentres

Microsoft has reported revenue of $64.7bn for the quarter which ended June 30, driven by artificial intelligence (AI) and the company’s platform strategy. Revenue for the full year was $241.bn, which is an increase of 16% compared to 2023.

In his prepared remarks, CEO Satya Nadella said: “As a platform company, we are focused on meeting the mission-critical needs of our customers across our at-scale platforms today, while also ensuring we lead the AI era.”

Nadella said Microsoft now has more than 60,000 Azure AI customers, up nearly 60% year over year (YoY). He claimed that average spend per customer has continued to grow. 

Looking at the company’s Copilot AI offerings, Nadella said that Copilot accounted for over 40% of GitHub’s revenue growth this year, which he said makes GitHub Copilot a larger business than all of GitHub was when Microsoft acquired the source code repository in 2018 for $7.8bn.

He said Microsoft 365 Copilot customers increased more than 60% quarter over quarter. “Feedback has been positive, with the majority of enterprise customers coming back to purchase more seats,” Nadella added.

Microsoft’s Productivity and Business Processes business posted revenue of $20.3bn, while its Office 365 Commercial business reported growth of 13%, the Dynamics business grew 16%, and its Intelligent Cloud business posted a 19% increase in revenue to $28.5bn.

The company also experienced significant growth in its Teams collaboration platform. Nadella said: “We once again saw YoY usage growth. Teams Premium has surpassed three million seats, up nearly 400% YoY.”

Chief financial officer Amy Hood said that of the $13.9bn of capital expenditure (capex) the company reported in its latest financial statement, almost all is being spent on AI and cloud computing.

“Cloud and AI-related spend represents nearly all of total capital expenditures. Within that, roughly half is for infrastructure needs where we continue to build and lease datacentres that will support monetisation over the next 15 years and beyond. The remaining cloud and AI related spend is primarily for servers, both CPUs and GPUs, to serve customers based on demand signals.”

In the transcript of the earnings call posted on Motley Fool, Nadella was asked about the amount of expenditure on AI. He answered by discussing demand drivers such as growth in contact centres using the AI in Dynamics and the growth in adoption of the Azure AI stack. He said that these drive the bulk of the capex spend, adding: “That’s the demand signal.”

While capex includes datacentre construction, Nadella said that over 60% of capital expenditure is spent on the equipment that would only be purchased if there is demand for AI inference workloads.

Commenting on the results, Forrester’s principal analyst Lee Sustar said: “Investors and customers wondering whether Microsoft’s AI offerings are still hauling in revenue got some assurance amid lingering questions following the company’s quarterly earnings.

“The company noted that operating expenses for Intelligent Cloud grew 5% compared to the same period a year earlier due to the scale-out of AI infrastructure in Azure. Investors and Azure customers will be keeping an eye on that trend as an indicator of AI market success for Microsoft and the cloud providers generally.”

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