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Microsoft cloud growth accelerates on back of AI push

Microsoft’s fiscal third-quarter results exceeded Wall Street’s forecasts, leading to a 5% increase in shares during extended trading on Thursday.

Here’s how the company performed in comparison to the consensus from LSEG.

Earnings per share: $2.94, compared to $2.82 predicted
Revenue: $61.86, compared to $60.80 billion projected.
According to a release, Microsoft’s total revenue increased 17% year over year in the quarter ending March 31. Net income increased to $21.94 billion, or $2.94 per share, from $18.30 billion, or $2.45 per share, in the prior year quarter.

In terms of sales projections, Amy Hood, Microsoft’s finance director, forecasted $64 billion for the fiscal fourth quarter, which is lower than the $64.5 billion LSEG consensus. Hood’s prediction suggests a 42.3% operating margin, which is higher than the StreetAccount consensus of 41.5%.

“Currently, near-term AI demand is a bit higher than our available capacity,” Hood went on to say. Microsoft has increased capital expenditures to procure Nvidia graphics processing units for AI training and models.

Microsoft’s Intelligent Cloud sector, which includes the Azure public cloud, Windows Server, Nuance, and GitHub, produced $26.71 billion in sales in the third quarter of fiscal 2018. That is around 21% higher than the $26.26 billion expectation among experts polled by StreetAccount.

Revenue from Azure and other cloud services increased by 31%, compared to 30% the prior quarter. Analysts polled by CNBC expected 28.8%, while the StreetAccount consensus was 28.6%.

AI accounted for 7 percentage points of Azure growth, up from 6 % the prior quarter. Microsoft supplies cloud services for the ChatGPT chatbot from startup OpenAI, and businesses are increasingly using Azure AI services to develop their own skills for summarizing information and generating documents.

According to Hood, the capacity issue slowed Azure’s AI growth.

On a conference call with investors, Microsoft CEO Satya Nadella announced that the code-generation tool GitHub Copilot now has 1.8 million paid customers.

The Productivity and Business Processes unit, which includes Office productivity software, LinkedIn, and Dynamics customer relationship management software, generated $19.57 billion in revenue, up around 12%. The StreetAccount consensus estimate was $19.54 billion. This is the first full quarter of sales of the Copilot add-on for commercial Microsoft 365 subscriptions. Copilot is based on AI models from OpenAI, in which Microsoft has spent billions.

According to Nadella, Amgen is among the customers who have reserved 10,000 Copilot seats.

Microsoft’s More Personal Computing revenue was $15.58 billion. Revenue from the sector, which includes the Windows operating system, Surface PCs, video games, and search, climbed by almost 18% and exceeded the StreetAccount average of $15.08 billion. Revenue from Xbox content and services increased by 62% in October, mainly to the $75 billion acquisition of game producer Activision Blizzard, which included the popular Call of Duty franchise.

Sales of Windows licenses to device manufacturers increased 11%. Gartner, a technology industry research firm, reported that PC shipments climbed by 0.9% in the quarter. The demand for PCs was “slightly better than expected,” Hood stated.

During the quarter, Microsoft debuted Surface PCs with a key that allows easy access to the Copilot chatbot. The corporation began offering access to Copilot for small businesses with Microsoft 365 productivity software subscriptions and hired Mustafa Suleyman, co-founder of DeepMind, to lead a new Microsoft AI branch. Suleyman co-founded and led the startup Inflection, and several of its employees later joined Microsoft.

“We have been operating with speed and intensity, and this infusion of new talent will enable us to accelerate our pace yet again,” Nadella wrote in a message regarding the Inflection deal, which was reportedly for $650 million.

Excluding the after-hours rise, Microsoft shares are up 6% this year, in line with the S&P 500 index.



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