Microsoft admitted that investments in OpenAI will reduce the company’s own profit this quarter

Microsoft’s key financial indicators for the third quarter were higher than investors’ expectations. At least, revenue reached $65.59 billion versus expected $64.51 billion, and earnings per share were $3.3 versus $3.1. Revenue rose 16% YoY and profit 11%, but the latter will suffer in the current quarter due to the need to invest in OpenAI’s capital.

Image source: Microsoft

As CNBC notes, Microsoft’s total revenue at the end of the last fiscal quarter, which was the company’s first, increased by 16% year-on-year to $65.59 billion, and net profit increased by 11% to $24.67 billion. In the current quarter, the corporation expects revenue of $68.1 billion to $69.1 billion, which at the center of the range corresponds to annual growth of 10.6%. Analysts had expected revenue of $69.83 billion, so Microsoft’s own expectations were a disappointment.

Moreover, Microsoft CFO Amy Hood said that in the current quarter, net profit will have to be reduced by $1.5 billion, part of the company’s funds will be used to support the development of OpenAI. To date, Microsoft has managed to spend almost $14 billion on this startup. These funds were not spent in vain; generative artificial intelligence has helped Microsoft increase its revenue by several billion dollars. More detailed financial specifics of the interaction between the two companies are not publicly available, as this is required by agreements between them. It is generally accepted that by the end of September, Microsoft managed to invest about $13 billion in OpenAI, but the subsequent round of investments required another $750 million from it. The total amount of “other expenses” of Microsoft for the previous four quarters amounted to more than $2.3 billion, some of these funds were spent specifically on OpenAI.

Microsoft management admitted that suppliers are not able to provide it with the necessary amount of server equipment for data centers. In the current fiscal quarter, it is unlikely to be able to meet the demand for computing power from its own customers. “I am almost confident that in the second fiscal half of the year the balance of supply and demand will be at least partially restored,” said Satya Nadella, speaking about the prospects for the next calendar half of the year.

Last quarter, Microsoft reformed its financial statements, so not all indicators for the corresponding period may provide a clear picture of changes in specific market segments. However, the cloud business combined with Azure grew revenue by 33%, with artificial intelligence accounting for 12 percentage points of that growth. This result was higher than market expectations. In total, the Intelligent Cloud business increased revenue by 20% to $24 billion. Even with investments in Azure infrastructure, which increased operating expenses by 8%, the company was able to increase operating profit by 18% to $10.50 billion. In the current quarter, revenue Azure segment can also be measured in the range from 31 to 32%, according to the management of the corporation.

Microsoft Cloud’s revenue grew 22% to $38.9 billion, while the management profit margin was maintained at 71%, although it was a couple of percentage points higher a year ago. The cost of scaling AI infrastructure was the main driver of this decline. Server products themselves reduced Microsoft’s core revenue by 1%, as did partner programs with corporate clients.

Productivity and business processes, as Microsoft calls them, increased the company’s revenue by 12% year-over-year to $28.3 billion. In the commercial segment, Microsoft 365 solutions and cloud services increased revenue by 13%; in the consumer segment, the increase did not exceed 5%. The Dynamics family of products and related cloud services increased revenue by 14%.

In the “more personal computing” segment, Microsoft’s revenue was able to grow by 17% to $13.18 billion year-on-year, but operating profit in this area decreased by 4% to $3.53 billion. This was largely due to a 49% increase in operating expenses due to the Activision takeover deal. In the Windows (OEM) and devices segment, the company’s revenue grew by 2%, but Xbox-related games and services increased core revenue by 61%. Microsoft’s search and news revenue, excluding traffic costs, grew by 18%.

The company’s overall operating income rose 14% to $30.6 billion, net income rose 11% to $24.7 billion, and earnings per share rose 10% to $3.3 billion. Last quarter’s capital expenditures of $14 92 billion were above analysts’ expectations, and the revenue forecast for the current period disappointed them, as a result of which Microsoft’s stock price fell by 3.73% after trading. A year earlier, the corporation’s capital expenditures did not exceed $9.9 billion, so their noticeable increase also alerted investors. In the current quarter, Microsoft’s profit margin in the cloud segment will also decline year-on-year due to the need to increase capital expenditures.