Microsoft forecast on Wednesday stronger-than-expected quarterly growth for its cloud-computing business Azure after blowout results in the latest quarter, assuaging investor worries in an uncertain economy and lifting its shares 8 per cent after hours.
Microsoft's results, which follow similarly above-expectations outcomes from Google last week, could ease concerns about a potential slowdown in AI demand, after some analysts pointed to cancelled data-centre leases at Microsoft as a sign of excess capacity.
Investors had also been worried about the fallout from sweeping US tariffs that are prompting businesses to rein in spending.
Microsoft said revenue at its Azure cloud division rose 33 per cent in the third quarter ended March 31, exceeding estimates of 29.7 per cent, according to Visible Alpha.
AI contributed 16 percentage points to the growth, up from 13 points in the previous quarter.
The company also forecast cloud-computing revenue growth of 34 per cent to 35 per cent on a constant currency basis for the fiscal fourth quarter, well above analyst estimates of 31.8 per cent, according to data from Visible Alpha.
The company forecast revenue for its intelligent cloud segment between US$28.75 billion and US$29.05 billion, with the entire range above analyst estimates of US$28.52 billion, according to LSEG data.
The company said its commercial bookings growth - which reflects new infrastructure and software contracts signed by business customers - was up 18 per cent in the fiscal third quarter, driven in part by a new Azure contract with ChatGPT creator OpenAI.
Microsoft declined to comment on the size of the deal or what role it played in overall Azure sales growth.
"In a quarter clouded by tariff fears and AI spending scrutiny, this quarter is a clear win - even if it wasn’t fireworks," said Jeremy Goldman, senior director of briefings at E-marketer.
"Azure and other cloud services beat Street expectations - and Microsoft Cloud’s growth shows it continues to turn AI infrastructure into margin-friendly growth."
"Still, investors will be watching closely as the company continues to pull back on data centre expansion."
In the third quarter, Microsoft's capital expenditures rose 52.9 per cent to US$21.4 billion, less than estimates of US$22.39 billion, according to Visible Alpha.
However, the proportion of longer-lived asset expenditures fell to about half of the total.
Jonathan Neilson, Microsoft's vice president of investor relations, said that reflected a shift in Microsoft's spending from long-lived assets such as data centre buildings toward more spending on shorter-lived assets such as chips.
"You plug in CPUs and GPUs, and then you can start recognising revenue," Neilson said, referring to categories of chips made by Intel, Advanced Micro Devices and Nvidia, among others.
The Intelligent Cloud unit, which houses Azure, posted revenue of US$26.8 billion, compared to expectations of US$26.17 billion.
Overall, revenue rose 13 per cent to US$70.1 billion, beating estimates of US$68.42 billion, according to data compiled by LSEG.
Microsoft reported a profit of US$3.46 per share in the quarter, beating expectations of US$3.22 per share.
The company also benefited from a 6 per cent increase in revenue at its more personal computing unit, which includes Xbox and its line of laptops.
Microsoft, which has also repeatedly said it is capacity constrained on AI, has been pouring billions into building its AI infrastructure and expanding its data-centre footprint.
A senior Microsoft executive reiterated earlier this month that the company would spend US$80 billion on its data centre build-out this year, and investors will be watching closely to see if it reaffirms that on its post-earnings call.
A pullback in Big Tech's AI spending will have big implications for suppliers such as chip giant Nvidia, as well as the US economy.
JP Morgan analysts estimated in January that data-centre spending could contribute between 10 and 20 basis points to US economic growth in 2025-2026.
Neilson said inventory levels had already been high during the company's fiscal second quarter as retailers stocked up on computers and gaming consoles on tariff worries.
That activity continued into the third quarter, he said.
"We expected in Q3 for them to bring inventory levels down to a more normal level. What we actually saw was inventory levels remained elevated," Neilson said.
"There continues to be some uncertainty there."
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