On the day CEO Satya Nadella discussed Microsoft’s “planet-scale cloud and AI factory,” Azure cloud – the IT infrastructure underpinning this – was offline for more than eight hours.
According to the company’s latest quarterly results, Microsoft cloud revenue surpassed $49bn, an increase of 26% compared to the same quarter last year. Overall, Microsoft posted revenue for $78bn, up 18%.
“We are seeing increasing demand and diffusion of our AI platform and family of Copilots, which is fueling our investments across both capital and talent,” Nadella said during the earnings call.
Nadella said that Microsoft now has 900 million monthly active users of AI features across its products. The company reported an increase in capital expenditures to $35bn, driven by growing demand for its cloud and AI offerings.
Chief financial officer Amy Hood said: “This quarter, roughly half of our spend was on short-lived assets, primarily GPUs [graphics processor units] and CPUs [central processor units], to support increasing Azure platform demand, growing first-party apps and AI solutions, accelerating R&D by our product teams, as well as continued replacement for end-of-life server and networking equipment.”
There is also longer term expenditure, which includes $11bn of finance leases that are primarily for large datacentre sites.
Speaking about the company’s need to buy more CPUs and GPUs, Hood admitted Azure would be “capacity constrained”, adding: “We will continue to balance Azure revenue growth with the growing needs across our first-party apps and AI solutions, our own R&D efforts and the end of life server replacements. Therefore, we now expect to be capacity constrained through at least the end of our fiscal year.”
As workloads pivot from CPUs to GPUs, Hood acknowledged has meant the company has struggled to keep pace. “We’ve been short now for many quarters. I thought we were going to catch up – we are not. Demand is increasing. It is not increasing in just one place, it is increasing across many places,” Hood added.
Commenting on the Microsoft results, Forrester’s principal analyst Tracy Woo said: “Microsoft delivered on expectations, but its level of AI investment is cause for concern. Average enterprise AI spend is significantly lower than expected – due in part to limited production-ready use cases. This will change, but resizes the question of whether Microsoft has invested too heavily and too early in AI.
“For now, the company is benefiting from the AI hype, and cloud revenue has made considerable gains to AWS revenue in recent years, which is promising as Azure becomes a major revenue engine for Microsoft.”
Just a few hours prior to the earnings call, around 15:45 in the UK, the Microsoft cloud experienced an outage, which affected customers globally including a number of major retailers in the UK.
The company said that the root cause of the outage was “an inadvertent tenant configuration change within Azure Front Door [AFD]”. This triggered a widespread service disruption affecting its Azure customers whose IT uses AFD for global content delivery.
“The change introduced an invalid or inconsistent configuration state that caused a significant number of AFD nodes to fail to load properly, leading to increased latencies, timeouts and connection errors for downstream services,” Microsoft said.
