By Yuvraj Malik and Stephen Nellis
(Reuters) -Microsoft on Tuesday surpassed Wall Street estimates for fourth-quarter revenue and profit as its cloud business benefited from product upgrades featuring new artificial intelligence (AI) technology.
But costs rose sharply from the previous quarter as it built new data centers to support AI, and its shares ticked down about 1% in after-hours trade.
Wall Street is looking at how generative AI services may benefit Microsoft, which secured an early lead with investments in OpenAI, owner of the popular ChatGPT service.
Microsoft is weaving AI into its own products, such as the $30-a-month "Copilot" for its Microsoft 365 service that can summarize a day's worth of emails into a quick update. It is also aiming to sell cloud computing services that other firms will use to build AI services.
Microsoft's results show heavy spending on AI services ahead of commensurate revenue growth.
While its Azure sales growth rate was slightly higher than market expectations, Microsoft's quarterly capital expenditures hit the highest single-quarter total since at least its fiscal 2016. The company is battling other cloud providers for a limited supply of chips from Nvidia Corp, whose graphics processing units are essential for creating AI products and services.
Brett Iversen, Microsoft's vice president of investor relations, told Reuters the company's spending reflects its demand expectations for AI services.
"You've seen a ton of excitement and customer interest on our various AI offerings, and that informs the CapEx spend that we need to do to build out the capacity to deliver against all of that."
Revenue rose to $56.2 billion in the fiscal fourth quarter ended June 30, compared with analysts' consensus estimate of $55.5 billion according to Refinitiv. Net income was $2.69 per share, above estimates of $2.55 per share.
Microsoft's Intelligent Cloud unit, which houses the Azure cloud computing platform, increased its revenue to $24 billion, compared with expectations of $23.8 billion.
Azure revenue rose 26%, beating a 25.2% growth estimate from Visible Alpha.
The company does not break out the absolute revenue figure for Azure, the part of Microsoft's business best situated to capitalize on booming interest in AI.
The company is still navigating a PC business slump, with sales including of its Windows operating system falling to $13.9 billion. This compares with analysts' consensus estimate of $13.6 billion according to Refinitiv.
The Microsoft segment containing the LinkedIn social network and its Office productivity software grew to $18.3 billion, compared with analysts' consensus estimate of $18.1 billion according to Refinitiv data.
Capital expenditures jumped to $10.7 billion from $7.8 billion in the fiscal third quarter, after the company told investors that spending would rise as it builds out data centers for AI work.
"We remain focused on leading the new AI platform shift," Chief Executive Satya Nadella said in a statement announcing the results.
Microsoft has started integrating AI functionality across its products such as Azure, Microsoft 365, GitHub and several developer tools.
(Reporting by Yuvraj Malik in Bengaluru; Editing by Devika Syamnath and Richard Chang)
