Microsoft’s cloud computing business is not growing as strongly as expected. This is due to a shortage of data centres to handle the rising demand for AI products.
The Azure cloud division is expected to grow 32% in the fiscal third quarter, which is not much faster than growth in the last three months of 2024. According to Bloomberg, the company’s shares fell about 5% in after-hours trading following the announcement.
Microsoft is a leader in commercialising AI products, thanks partly to its close partnership with ChatGPT maker OpenAI. Over the past year, the company launched a series of Copilot AI assistants. Efforts to monetize these products are taking longer than some investors had hoped.
Strong growth in cloud services
Microsoft reported that Azure AI services grew 157% in the quarter. However, chief financial officer Amy Hood said in an interview that overall revenue growth in the main cloud division is being limited by the company’s still lack of sufficient data center capacity to meet customer demand. She added that the capacity constraints should be resolved by the end of the fiscal year.
The company has nearly $300 billion in commercial service contracts that Microsoft must deliver in the future and has not yet recognized as revenue.
Demand remains strong, with commercial bookings – a measure of future revenue – up 67%. That was well above Microsoft’s expectations. Hood attributed that in part to Azure commitments from OpenAI.
High investments
Along with cloud competitors Google and Amazon.com, Microsoft is investing more than ever. Especially in chips and data centers that are needed to support energy-intensive AI services. The company expected to spend $80 billion on AI data centers this fiscal year.
Wall Street, however, is beginning to question this massive spending. Especially after Chinese newcomer DeepSeek released an open-source AI model that it says rivals the capabilities of American technology at a fraction of the cost.
Capital expenditures in the quarter were $22.6 billion, higher than analyst expectations of about $21 billion. Infrastructure expansion led to smaller margins in the cloud business.
AI drives more revenue
Total revenue in the three months ended Dec. 31 rose 12% to $69.6 billion. In the quarter, the second of Microsoft’s fiscal year, earnings were $3.23 per share. According to Bloomberg data, analysts had expected revenue of $68.9 billion and earnings of $3.12 per share.
The company indicated that 13 percentage points of Azure’s growth in the second quarter was due to AI, compared with 12 points in the first quarter. Microsoft reported that AI revenue in the quarter reached a level where it was expected to generate $13 billion a year.