TLDR
- Microsoft reported Q1 earnings of $3.72 per share on $77.7 billion revenue, beating analyst forecasts of $3.68 per share and $75.5 billion.
- Commercial cloud revenue climbed 26% to $49.1 billion while Azure posted 40% growth, driving Intelligent Cloud segment to $30.9 billion.
- Net income absorbed a $3.1 billion charge from OpenAI investment accounting, reducing earnings per share by 41 cents despite year-over-year profit growth.
- Capital spending soared 74% to $34.9 billion as Microsoft invested heavily in GPUs and CPUs for Azure AI infrastructure.
- New OpenAI agreement gives Microsoft a 27% stake worth $135 billion and secures $250 billion in Azure commitments, but removes first refusal rights.
Microsoft delivered better-than-expected first quarter results on Wednesday evening. The company posted earnings of $3.72 per share on revenue of $77.7 billion.
Analysts had anticipated $3.68 per share and $75.5 billion in revenue. The year-ago quarter brought in $3.30 per share and $65.6 billion in revenue.
Shares declined more than 2% following the announcement. The drop came despite beating expectations on both top and bottom lines.
Commercial cloud performance remained strong. Revenue reached $49.1 billion, growing 26% from last year and exceeding the $48.6 billion analyst estimate.
Azure continued as the growth engine. The cloud platform expanded revenue by 40% during the quarter.
The Intelligent Cloud division generated $30.9 billion in revenue. Wall Street predicted $30.2 billion for the segment.
Rising Infrastructure Costs
Capital expenditures painted a costlier picture. Spending increased 74% year over year to $34.9 billion in the quarter.
Microsoft allocated roughly half to GPUs and CPUs. These processors support Azure’s expanding AI capabilities and customer workloads.
The earnings came as Azure services bounced back from a Wednesday outage. The disruption affected business operations worldwide, similar to an AWS outage the previous week.
OpenAI Deal Reshapes Partnership
Microsoft’s net income took a $3.1 billion hit this quarter. The charge reflected equity method accounting for its OpenAI investment.
The adjustment cut earnings per share by 41 cents. Net income still grew to $27.7 billion from $24.67 billion last year.
Total OpenAI commitments reached $13 billion. Microsoft had funded $11.6 billion through September according to company filings.
OpenAI completed its recapitalization on Tuesday. The AI company restructured with its nonprofit holding a controlling stake in the for-profit business.
New Terms and Future Direction
Microsoft now owns 27% of OpenAI’s public benefit corporation. The stake carries a $135 billion valuation on an as-converted diluted basis.
Key partnership terms shifted under the revised agreement. Microsoft no longer holds first right of refusal as OpenAI’s compute provider.
OpenAI committed to purchasing $250 billion in Azure services as part of the deal. CEO Satya Nadella called the partnership one of the industry’s most successful.
The companies started collaborating in 2019. Their relationship began well before ChatGPT’s late 2022 debut.
Both firms increasingly compete in AI markets. Microsoft added OpenAI to its competitor list in last year’s annual report, citing overlaps in AI offerings and search advertising.
Microsoft previously served as OpenAI’s exclusive cloud provider. The arrangement changed to allow OpenAI partnerships with other providers like Oracle for the Stargate Project.
The company began testing its own AI model in August. The internal development could reduce dependence on OpenAI technology for products like Copilot.
The OpenAI Foundation holds a 26% stake in the for-profit arm. Current and former employees plus investors control 47% of the restructured company.
Microsoft invested $11.6 billion of its $13 billion commitment through the end of September.
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