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Microsoft posted double-digit growth in both revenue and earnings for the first quarter, driven by advancements in AI integrated into its cloud services, but its forecast for slower growth in the cloud business dampened investor sentiment.

The tech firm’s shares declined by about 4% in after-hours trading.

“We are off to a solid start to our fiscal year, driven by continued strength of Microsoft Cloud,” Microsoft Chairman and Chief Executive Officer Satya Nadella, said in his opening remarks, during the company’s first-quarter earnings call.

Microsoft’s overall cloud revenue for Q1 FY25 was $38.9 billion, up 22% year-over-year. Its financial year runs from July 1 to June 30, while other major tech companies often use the calendar year.

The Windows maker’s revenue increased 16% year-on-year to $65.6 billion in Q1 FY25. Its net profit in the quarter surged to $24.7 billion, up 11% from the corresponding previous period.

Microsoft is a key player in the cloud computing industry, competing with Amazon Web Services (AWS) and Google Cloud. According to data from Synergy Research Group, their market shares were 32%, 23%, and 12% respectively, as of Q2 2024.

In Q1 FY25, revenue growth (in constant currency) from Azure cloud computing platform and other cloud services was 34%, compared with 30% in corresponding quarter last year. The company forecasted second-quarter Azure revenue growth of 31% to 32% in constant currency compared to 31% reported in the year-ago period.

“Demand continues to be higher than our available capacity,” said Amy Hood, executive vice president and chief financial officer of Microsoft, during the earnings call.

“In H2, we still expect Azure growth to accelerate from H1 as our capital investments create an increase in available AI capacity to serve more of the growing demand,” she added.

The CFO said that the company’s capital expenditures in the first quarter was $20 billion. “We expect capital expenditures to increase on a sequential basis, given our cloud and AI demand signals,” she added, speaking about Q2 outlook.

Tech giants like Microsoft, Google, and Meta have significantly increased their capital expenditure (capex) to expand their server and data centre infrastructure, driven by the exponential growth of AI and its demanding computational requirements.

Focus on AI

Microsoft, a major investor in OpenAI, recently solidified its partnership by significantly increasing its investment. This move has catapulted the ChatGPT maker’s valuation to $157 billion.

During the call, Nadella noted, “Our partnership with OpenAI also continues to deliver results. We have an economic interest in a company that has grown significantly in value, and we have built differentiated IP and are driving revenue momentum.”

“This quarter, we added support for OpenAI’s newest model family, o1. We are also bringing industry-specific models through Azure AI,” he added.

Microsoft expects to incur a loss of approximately $1.5 billion in the second quarter due to its investment in OpenAI. Expected loss from OpenAI is accounted for under the equity method, as per Hood.

“We are excited that only 2.5 years in, our AI business is on track to surpass $10 billion of annual revenue run rate in Q2. This will be the fastest business in our history to reach this milestone,” she said.

Business segments

The Redmond-headquartered firm broadly categorises its revenue under three segments—productivity and business processes, intelligent cloud, and more personal computing.

Microsoft’s productivity and business processes clocked in $28.3 billion in revenue in the quarter, up 12% year-over-year. Revenue for intelligent cloud, which includes the Azure cloud computing platform, rose 20% to $24.1 billion in the September-ended quarter.

More Personal Computing—which includes revenue from Windows OEM, Devices, Xbox content and services, Search and news advertising—was up 17% to $13.2 billion in the quarter.

Microsoft’s business and employment-oriented online service LinkedIn’s revenue increased 10%, slightly ahead of expectations with growth across all lines of business.

Speaking about LinkedIn’s business, Nadella said, “Member growth continues to accelerate with markets in India and Brazil both growing at double digits.”

Gaming continues to be a key focus area for Microsoft, with the company making significant advancements in recent years, including the introduction of next-generation consoles and cloud gaming.

On October 13, 2023, Microsoft completed the acquisition of Activision Blizzard, the developer of Call of Duty, marking its largest-ever and the gaming industry’s biggest deal.

“One year since we closed our acquisition of Activision Blizzard King, we are focused on building a business positioned for long-term growth, driven by higher-margin content and services,” said Nadella.