Microsoft CFO says OpenAI investment will cut into profit, with projected income for the quarter expected to drop by $1.5 billion. Microsoft’s fiscal first-quarter results exceeded Wall Street expectations on both earnings and revenue, but the tech giant’s shares fell by 4% in extended trading due to concerns over a slower growth forecast. Key to this projection is Microsoft’s significant investment in OpenAI, which CFO Amy Hood confirmed would result in a $1.5 billion reduction in income in the current quarter due to OpenAI’s anticipated losses.
For the quarter ending September 30, Microsoft reported adjusted earnings per share of $3.30, surpassing the $3.10 analyst consensus, and revenue of $65.59 billion, above the expected $64.51 billion. This marked a 16% increase in revenue and an 11% boost in net income to $24.67 billion year-over-year. However, Microsoft’s forecast for the current quarter, with revenue projected between $68.1 billion and $69.1 billion, implied a 10.6% growth rate, below the $69.83 billion analysts had anticipated.
Data Center Constraints and Azure Demand
Despite strong revenue numbers, Microsoft CFO says OpenAI investment will cut into profit and impact earnings for the next quarter. While Microsoft faces challenges with supply delays from external providers for data center infrastructure, CEO Satya Nadella expressed optimism that supply-demand issues could be resolved in the fiscal year’s second half. For the first time, Microsoft reported cloud consumption specifically, showing 33% Azure growth—34% adjusted for currency, with artificial intelligence contributing 12 percentage points. This growth rate surpassed both CNBC and StreetAccount’s expectations of 32.8% and 29.4%, respectively. Hood projected Azure growth of 31-32% in constant currency for the current quarter.
In August, Microsoft adjusted its segment reporting to reflect a revised approach. Productivity and business processes, which now include certain Windows revenue streams and security services, grew by 12% to $28.32 billion, exceeding the $27.9 billion forecast. The intelligent cloud division, which encompasses Azure, Windows Server, and enterprise services, reached $24.09 billion, a 20% increase and just above the $24.04 billion estimate from StreetAccount. The restructured “more personal computing” segment, encompassing Windows operating system licenses and devices, showed revenue of $13.18 billion, up 17% from the previous year and above the anticipated $12.56 billion.
Impact of OpenAI Investment
OpenAI, a central element of Microsoft’s growth strategy, has led to substantial AI-driven innovation, including integrations with products across Microsoft’s portfolio. Microsoft has invested nearly $14 billion in the AI startup, which recently received a valuation of $157 billion after another $750 million contribution in October. Yet, OpenAI continues to report high losses, with projections indicating a $5 billion loss for the year on $4 billion in revenue. Hood explained that Microsoft accounts for this investment using the equity method, reflecting the company’s share in OpenAI’s profits or losses.
Microsoft’s spending on property and equipment rose by 50% year-over-year to $14.92 billion in the first quarter, with the demand for cloud infrastructure and AI-driven workloads continuing to rise. As of September 30, Microsoft’s financial commitments in finance leases, exceeding $108 billion, are anticipated to cover third-party cloud spending aimed at AI infrastructure expansion. Demand outpaces capacity in the cloud sector, according to Hood, with AI demand driving revenue momentum across the business.
In line with future plans, Microsoft CFO says OpenAI investment will cut into profit, which has raised questions about AI’s impact on short-term profitability. Microsoft’s strategic focus on OpenAI mirrors moves by competitors in the AI landscape. Amazon recently invested $4 billion in Anthropic, an AI model firm founded by former OpenAI staff. Meanwhile, Microsoft’s GitHub has opened the Copilot Chat feature to third-party models, including Google and Anthropic’s offerings, underscoring its flexibility in balancing AI investments and hedging its bets in the dynamic AI market.
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