Microsoft released a solid earnings report on Wednesday, with revenue of $81.3 billion (up 17%) and net income of $38.3 billion (up 21%) for the quarter, with record Microsoft cloud revenue of more than $50 billion.
But the stock was soaring on Thursday as investors worried about how much the tech giant was spending building its cloud and questioned whether the investment would pay off. Microsoft CEO Satya Nadella said the answer to that question is “yes,” and he spent considerable time on the earnings call making that point.
Microsoft spent about the same amount on capital expenditures in the first half of the year as it did all of last year. And the numbers are really huge. Microsoft spent $88.2 billion on capital spending last year and $72.4 billion so far this year.
Much of that spending goes toward delivering AI to enterprises and major AI labs, particularly OpenAI and Anthropic. The big question on investors’ minds is: Will spending translate into more usage and ultimately profits?
Investors are concerned that Microsoft’s flagship enterprise cloud product, Azure, and its Microsoft 365 apps haven’t grown as quickly as expected.
“The fact that both the Azure and M365 segments are down a bit is the main negative factor we’re hearing,” UBS Wall Street analyst Karl Keilstead said in a research note Thursday. (However, Kiersted isn’t worried about that and recommends buying the stock.)
Still, a few months ago, news reports came out saying that people don’t actually want to use Microsoft’s AI, even though Copilot is built into all sorts of Microsoft products.
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Mr. Nadella spent much of his earnings call on activities best described as PR around the use of AI. Despite his pitching, some of the numbers he put up were pretty shaky.
For example, Nadella said the number of daily users of its consumer-facing Copilot AI product has increased “nearly three times year over year.” This refers to AI chat, news feed, search, browsing, shopping, and “integration into the operating system.”
The actual number of users was not disclosed. (We contacted Microsoft to inquire.)
In last year’s annual report, the company announced that Copilot has more than 100 million monthly active users, including both commercial and consumer users.
He was more candid about GitHub Copilot, Microsoft’s coding AI, saying it currently has 4.7 million paid subscribers, up 75% year over year. It looks like a healthy business. Last year, Microsoft said in its annual report that GitHub Copilot has 20 million users, including those who chose the free tier.
He also said that Microsoft 365 Copilot currently has 15 million paid seats that companies have purchased for their employees. The company says this is out of a base 450 million paid seats.
And Nadella called out the growth of Dragon Copilot, Microsoft’s healthcare AI agent for medical professionals (a competitor to the buzzy start-up Harvey). He said the product was available to 100,000 healthcare providers and was used to document 21 million patient encounters in the quarter, tripled from the same period last year.
Is it worth spending billions of dollars on data centers? Nadella clearly thinks so. He and Chief Financial Officer Amy Hood said on the earnings call that demand for AI services across a variety of products far exceeds data center supply, so all new equipment essentially has capacity reserved for its lifetime.
