Microsoft warns of “material” AI spending ramp up

© Reuters.

Investing.com — Microsoft (NASDAQ:MSFT) shares inched lower in premarket U.S. trading on Wednesday after the world’s largest company by market value warned that capital spending will rise as it pushes to scale up its artificial intelligence capabilities.

In a call after the release of its second-quarter results, executives from Redmond, Washington-based Microsoft told analysts that the need to scale its AI infrastructure would cause expenditures to “increase materially” on a sequential basis in areas like data centers and servers.

Chief Financial Officer Amy Hood said that Microsoft, whose market capitalization surpassed $3 trillion earlier this month, is shifting to an “AI-first position.”

“[T]he important part [is to] invest toward the thing that’s going to shape the next decade and continue to stay focused on being able to deliver your day-to-day commitments,” Hood said.

Analysts at Deutsche Bank argued in a note to clients that Microsoft’s guidance may indicate some near-term “compression” of free cash flow margin, although they added it should be seen as a “positive signal” for the potential future performance of Microsoft’s AI services.

Microsoft and other tech giants have been pushing to expand the presence of AI in their products in response to a recent surge in demand for the nascent technology. Central to Microsoft’s strategy has been its stake in OpenAI, the research organization behind popular chatbot ChatGPT that has become a focal point of the soaring enthusiasm over AI. Microsoft, which owns 49% of OpenAI, has committed to investing more than $10 billion in the firm.

The OpenAI bet has led investors to keep a closer eye out for possible financial gains in Microsoft’s cloud unit, a key revenue driver that includes the all-important Azure computing platform.

Sales at Azure grew by 30% in the second quarter thanks in large part to solid demand for AI services. According to Chief Executive Officer Satya Nadella, Azure now has 53,000 AI customers, with over one-third added in the past twelve months. Cloud segment revenues subsequently rose by 20% to $25.9 billion, topping analyst predictions of $25.3B.

The group did not disclose any figures for its new Microsoft 365 Copilot, a generative AI assistant built into many of the company’s applications, but Nadella said early signs suggest it is on track to become “standard issue” for many corporate customers.

“Microsoft is firing on all cylinders and AI is clearly driving growth. The results indicated that artificial intelligence products are stimulating sales and already contributing to top and bottom-line growth,” said Jesse Cohen, Senior Analyst at Investing.com, in a note.

Total revenue jumped by 18% in the three months ended on Dec. 31 to $62B, lifting earnings per share to $2.93. Both metrics beat Wall Street estimates.

Yasin Ebrahim contributed to this report.

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