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After Microsoft (MSFT) reported better-than-expected earnings for the fiscal fourth quarter but its cloud growth missed estimates, executives gave investors an update on the tech giant’s investments in artificial intelligence (AI), capability constraints, outlook, and more in the company’s earnings call.
AI Capability Constraints Hold Back Cloud Growth
Microsoft CFO Amy Hood said that the company’s AI-related capability lagging demand, coupled with weakness in some European regions, contributed to the company’s softer-than-expected cloud growth.
The CFO said there “was some softness on non-AI consumption” in some European markets, and that “capability constraints particularly on AI and Azure” contributed to cloud revenue coming in on the lower end of previous guidance ranges.
Hood added that AI capability could proceed to lag behind demand until the second half of 2025.
Ramping Up Investment in AI To Meet Demand
Microsoft, along with a lot of its big tech peers, is boosting its investments in AI to secure its position as a pacesetter inside the space, raising concerns about higher costs.
When asked about how the company’s investments could repay, Microsoft CEO Satya Nadella said capital expenditures are being guided by “demand signals,” including Azure AI growth, and that the company’s spending would change if demand shifts.
Microsoft executives said current capital spending would allow the company to satisfy AI demand inside the second half of fiscal 2025, which could drive revenue gains.
Clould and AI Investments Make Up Nearly All of Microsoft’s Capital Expenditures
Hood said nearly all of Microsoft’s $19 billion in capital expenditures were related to cloud or AI investments.
Around half of the spending was dedicated to infrastructure, with the company constructing and leading data centers, that the CFO said “will support monetization over the next 15 years and beyond.”
Executives told analysts that the company views its investments in AI infrastructure and data centers as long-term assets and emphasized their flexility, echoing similar comments from Alphabet (GOOGL) CEO Sundar Pichai last week suggesting the pliability of AI infrastructure solutions like data centers could lower the danger of overinvesting inside the technology.
Double-Digit Revenue Growth Expected in Fiscal 2025
Hood said Microsoft anticipates double-digit revenue growth in fiscal 2025 as the company works to lift capability to satisfy demand.
The CFO said that cloud revenue is predicted to grow between 28% and 29% year-over-year in the first quarter of fiscal 2025.
Microsoft shares were down near 3% at $411.40 in prolonged trading as of 8:40 p.m. ET Tuesday following the company’s earnings call.
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