Microsoft has reported impressive earnings for the October to December quarter of 2024, with net income rising to $24.1 billion, up 10% from the same period last year, as the tech giant continues to push the envelope on artificial intelligence (AI) investments. The company's revenues reached $69.6 billion, marking a 12% year-on-year increase, surpassing Wall Street's expectations of $68.87 billion.
Chief Executive Officer Satya Nadella expressed optimism about the company's growth during the earnings call, stating, "DeepSeek had some real innovations and it is good to have efficiency gains and lower prices in AI development." This statement emerged against the backdrop of Wall Street concerns spurred by claims from DeepSeek, a Chinese AI startup, which indicated it could match the capabilities of U.S. tech giants for significantly lower costs. Microsoft, already heavily invested alongside its partner OpenAI, perceived the threat as manageably competitive.
Microsoft's decision to invest significantly — approximately $80 billion — this fiscal year primarily aims to bolster its data center capabilities, which Nadella noted has more than doubled over the past three years. "We have added more capacity last year than any other year in our history," he added, emphasizing the urgency of meeting increasing customer demand for both AI and cloud computing services.
Overall sales from Microsoft's cloud-focused business segment, particularly Azure, grew by 19% year-over-year, reaching $25.5 billion. While this figure indicates continued growth, it fell slightly short of the $25.83 billion expected by analysts. Despite this, the growth remains promising, with AI contributing to more than a third of Azure's revenue growth.
The productivity business segment of Microsoft, which includes the widely used Office suite of products, also showed positive momentum, growing 14% to $29.4 billion. Meanwhile, the personal computing sector remained steady at $14.7 billion, as advertising revenue tied to Bing helped mitigate declines from consumer device sales.
After the earnings announcement, Microsoft shares saw volatility, dropping 5% during after-hours trading amid investor concerns linked to the broader tech sector's fluctuations. This drop followed the stock's decline earlier this week, prompted by the competitive potential of DeepSeek's newly unveiled AI model.
On the investor call, Nadella did not shy away from addressing worries instigated by the rapid rise of DeepSeek, asserting, "Growth in sales of Microsoft’s flagship cloud computing service, Azure, slowed to 31%, slightly below Wall Street’s expectations." Investors remain hopeful for improved sales as Microsoft continues to expand its infrastructure this year.
There is cautious optimism surrounding Microsoft’s AI initiatives, especially as they look to diversify beyond their longstanding partnership with OpenAI. The company has begun including additional AI models on its Azure platform, such as those from DeepSeek, which may increase competition yet also lead to broader access and reduced costs for consumers. Analysts, including Karl Keirstead from UBS, noted, "On a day like today, the ‘bet’ looks like a clever one," reflecting on the strategic advantages of Microsoft’s partnerships.
Despite uncertainties surrounding capital expenditures prompted by operational adaptations, Amy Hood, Microsoft’s finance chief, conveyed to investors during the earnings report call, "we would increase capital expenditures next fiscal year, but the growth would be at a slower pace." This tempered approach indicates the company's strategy to balance growth with prudent financial management.
AI sales were reported to have surpassed an annualized run rate of $13 billion, leading many to speculate on the potential for accelerated growth as technology becomes increasingly integrated across industries. With the results from the last quarter painting the picture of resilience and growth, Microsoft appears poised to maintain its lead, albeit with heightened competition.
Looking forward, the tech community will be watching closely as Microsoft navigates this rapidly-evolving AI market, reflecting on the need for agility and adaptation. With ambitious investment plans and streamlined operational strategies, Microsoft seeks to not only keep pace but thrive against formidable challengers, carving out its niche within the expansive AI ecosystem.