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Microsoft has reported its fourth-quarter earnings for the fiscal year 2024, surpassing analysts’ estimates.

However, its shares dropped by more than 3% in after-hours trading due to the disappointing growth pace in Azure cloud services, seen as the core segment supporting the tech giant in competing against its artificial intelligence (AI) rivals.

Furthermore, the world’s second-largest company increased spending on data centre construction, causing investors to be concerned about its profit margins.

Numbers

Microsoft reported earnings per share of $2.95 (€2.72) on revenue of $64.7bn (€59.56 bn), surpassing analyst estimates of $2.94 and $64.5bn, respectively. The sales revenue rose by 15% from a year ago, slowing from the 17% growth in the March quarter. Net income amounted to $22bn (€20.3bn), up 10% from the same quarter last year.

“We closed out our fiscal year with a solid quarter, highlighted by record bookings and Microsoft Cloud quarterly revenue of $36.8bn, up 21% (up 22% in constant currency) year-over-year,” CFO Amy Hood said during the earnings call. Cloud business contributed 57% of its total revenue, which is critical for the company’s growth.

Slowing down growth in Azure

Despite exceeding expectations on both revenue and net income, the growth of its key metric, revenue from intelligent cloud, including Azure, fell short of market expectations. The segment’s sales were $28.5bn (€26.24bn), below the estimated $28.7bn. Azure and other cloud services grew by 29%, missing analysts’ forecast of 31%. This also marks the slowest growth in the past three quarters.

On a positive note, AI contributed about 8% of the increase in that segment, up from 7% in the previous quarter and 6% in the final quarter of 2023. Azure Cloud holds the second place for global market share, behind Amazon Web Services (AWS) and followed by Google Cloud.

Other segments continue growth

Otherwise, all other divisions have shown growth and surpassed consensus expectations. The productivity and business process unit, which includes Office 365 and LinkedIn, generated revenue of $20.32bn (€18.71bn), up 11% from a year ago.

The more personal computing segment, including Windows operating systems, gaming, devices, and search advertising, reported revenue of $15.9bn (€14.64bn), representing a 14% growth from the same quarter last year.

Notably, gaming revenue surged by 61%, driven by a 58% growth of the Activision acquisition. However, device revenue decreased by 11% as the company continued to focus on higher-margin premium products. The company started selling surface PCs integrated with its Copilot+ running AI models in the June quarter. In the March quarter, it began selling Copilot access to small businesses, along with Microsoft 365 productivity software subscriptions.

A jump in AI spending

However, the company’s capital expenditure has surged to $19 bn (€17.5 bn) from $16bn (€16.2bn) in the March quarter. Microsoft faced capacity challenges as Hood mentioned in the fiscal third-quarter earnings call, which required increased investment in the data centre build amid meeting the fast-growing AI training demands. In the company’s Forward-Looking Statements, it noted that “significant investments in products and services that may not achieve expected returns”.

CEO Satya Nadella said: “As a platform company, we are focused on meeting the mission-critical needs of our customers across our at-scale platforms today, while also ensuring we lead the AI era.”