AI demand leads to Microsoft sales, profit beating expectations

AI assistants

Microsoft has leveraged its $13 billion investment in research pioneer OpenAI to create a series of AI assistants and other features. It’s weaving those capabilities into products ranging from Windows to Office, security software to search engine Bing, many of which carry additional fees for customers to use.

The company is spending heavily to expand its global network of data centers to meet rising demand for AI services — with capital expenses reaching $14 billion during the quarter. “We’re seeing the AI demand continue to grow, and so we’ll continue to work to match that,” Hood said.

On the call with analysts, she forecast capital spending would increase “materially” from the $14 billion last quarter. Capital expenditures in the fiscal year starting July 1 will also be higher than the previous year, Hood said. Right now, initial demand for AI services is running slightly ahead of the data center capacity Microsoft has available to provide them, requiring an increase in data center outlay.

On Nov. 1, the software giant widely released the corporate version of Microsoft 365 Copilot — an AI assistant for Office programs like Outlook, Word, PowerPoint and Teams — to large customers. The new tools cost companies an extra $30 a month on top of existing subscriptions, and could one day become a meaningful source of recurrent revenue. This year, Microsoft expanded access to smaller firms and debuted a $20 consumer version of the AI assistant. Nadella told analysts almost 60% of Fortune 500 customers are using the Copilot.

Microsoft is seeking to push AI outside the corporate market as well. Nadella last month hired Google DeepMind co-founder Mustafa Suleyman to oversee the company’s consumer AI operation, a move reflecting the CEO’s dissatisfaction with the company’s efforts to create and deploy AI products for home users, Bloomberg reported earlier.

The Redmond, Washington-based company is also baking AI into its fast-growing cybersecurity business. The company recently released tools that can generate summaries of suspicious incidents and ferret out methods hackers use to obscure their intentions. The cybersecurity operation, the world’s largest, is showing “relative strength,” according to a Bank of America Securities note.

Security overhaul

Yet, earlier this month, the U.S. Cyber Safety Review Board issued a scathing report documenting the company’s inability to stop hackers from breaching the email boxes of U.S. officials. The company has announced its biggest security overhaul in more than two decades, but it’s unclear whether the effort will adequately address the challenges — or mollify critics.

Microsoft’s desktop software business benefited from stabilizing demand for personal computers. Global PC sales returned to growth with a 1.5% gain in the quarter, according to market research firm IDC, driven by a recovery in most regions. Windows revenue rose 11% in the quarter, the company said.

Sales of Xbox content and services jumped 62%, thanks almost entirely to a revenue boost from the $69 billion acquisition of Activision Blizzard, completed last year. But Microsoft and rivals are still struggling to restore growth to the overall gaming industry, which is mired in a post-pandemic slump.

In an effort to rekindle sales, Microsoft is making four exclusive Xbox games available for Nintendo Co.’s Switch and Sony Group Corp.’s PlayStation.