Microsoft: Building new data centers to support AI will significantly increase costs.

As the "AI benchmark", Microsoft's latest earnings report shows that this giant is continuing to make a big bet on the AI route.

Overnight, Microsoft released its fourth-quarter report. Although both revenue and profit for this quarter exceeded Wall Street's expectations, the growth rate of cloud service revenue slowed down, and the impact of AI has not yet been apparent. In addition, capital expenditure on AI services is still accelerating, causing Microsoft's stock price to fall after hours.

According to the report, Microsoft's fourth-quarter revenue increased by 8% YoY to $56.2 billion, higher than the market's expected $55.49 billion. Diluted earnings per share increased by 21% YoY to $2.69, higher than the market's expected $2.56. The capital expenditure that the market is concerned about reached $8.94 billion, also higher than the market's expected $7.85 billion.

Looking at the entire fiscal year, Microsoft's revenue growth slowed to 7%, lower than the growth rate of over 10% in the past five fiscal years. And the capital expenditure for this quarter reached the highest quarterly total since at least the 2016 fiscal year.

At the same time, the revenue growth rate of Azure and other cloud services, excluding exchange rate fluctuations, slowed down to 27% YoY, compared to the 31% growth rate in the previous quarter, and Microsoft also predicts that the revenue growth rate for the first quarter of the 2024 fiscal year will further slow down to 25%-26%.

During the earnings conference call, Microsoft CFO Amy Hood stated that as Microsoft builds new data centers to support AI, capital expenditure will continue to rise in each quarter of the entire 2024 fiscal year, and it will be used for data centers, CPU chips, GPU chips, and network devices.

In after-hours trading, Microsoft's stock price fell nearly 4%.

The Impact of AI "Will Emerge in the Second Half of the Fiscal Year"

So far, Microsoft's investment in AI has not significantly boosted revenue.

Most of Microsoft's major product lines have already incorporated a range of new AI programs based on OpenAI models, and the market demand for this service is also surging.

However, the Office productivity suite, which embeds AI components, has not been widely used, and overall spending on Azure cloud services and Office applications is slowing down after years of continuous enterprise investment. At the same time, Microsoft's PC shipments have declined for the sixth consecutive quarter, eroding sales of Windows software and Microsoft devices. Microsoft CEO Satya Nadella is optimistic about the ultimate opportunity brought by Microsoft Copilot in terms of AI technology. He stated that companies need to not only consider how, but also how quickly and responsibly they can apply next-generation AI to address their biggest opportunities and challenges. Microsoft remains focused on leading the transformation of the new AI platform, helping customers maximize the value from their digital investments using Microsoft Cloud and improving operational leverage.

Nadella believes that people will consider using Copilot to supplement their operating expenses in order to improve efficiency and, frankly, even reduce operational expenses and personnel burdens.

Earlier this month, Microsoft announced the pricing of its Office 365 Copilot at $30 per user per month. This means that enterprise users who are already using Office 365 will have to pay an additional $30 per month to use Copilot.

Some analysts believe that Microsoft's pricing is too aggressive and expensive, while others believe that it will boost Microsoft's revenue.

Wedbush analyst Dan Ives believes that the announced pricing will expand Microsoft's market opportunities in cloud computing and AI, and could increase cloud computing annual revenue by 20% as early as 2025.

Similarly, Citigroup analyst Tyler Radke wrote that the pricing is much higher than their predicted range of $5 to $20 per month. Although it may still be several months away from full market release, we believe this is a significant positive development.