Microsoft says quarterly sales rose 16% to $65.6 billion as investors question whether AI costs are worth it

Microsoft on Wednesday said its quarterly sales rose 16% to $65.6 billion as the company sought to reassure investors that its massive spending on artificial intelligence is paying off.

The company has spent billions of dollars to expand its global network of data centers and other physical infrastructure needed to develop artificial intelligence technology that can compose documents, create images and serve as a realistic personal assistant at work or at home.

As a result, artificial intelligence-related products can now contribute about $10 billion to the company’s annual revenue, which is “the fastest business in our history to reach this milestone,” CEO Satya Nadella said on a call with analysts on Wednesday.

The software maker also reported an 11% increase in quarterly profit to $24.7 billion, or $3.30 per share, beating Wall Street expectations for the July-September period.

Analysts surveyed by FactSet Research expected Microsoft to earn $3.10 per share on revenue of $64.6 billion.

Microsoft has yet to officially report revenue from its AI products, but says it has rolled out the technology and its AI assistant, Copilot, across all segments of its business, especially its Azure cloud computing contracts.

Microsoft’s business segment, which includes Office for email and other workplace products, led the quarter, growing 12% to $28.3 billion.

Microsoft’s cloud-focused business segment grew 20% year-over-year to $24.1 billion in the three months ended Sept. 30.

Its personal computing business, led by its Windows division, grew 17% to $13.2 billion. Much of that growth came from Microsoft’s Xbox video game business, boosted by its purchase of game publishing giant Activision Blizzard a year ago.

Microsoft and makers of computers that use its Windows operating system also unveiled a new class of artificial intelligence-powered laptops this year as the company faces growing competition from big tech rivals in pushing generative artificial intelligence technologies to consumers and the workplace.

AI systems are expensive to build and operate, and Microsoft said it spent $20 billion in the quarter, mostly on cloud computing and AI needs. This involves building power-hungry computing centers and supplying them with specialized chips to train and run artificial intelligence models.

Microsoft has also invested billions of dollars in artificial intelligence startups, notably its partner OpenAI, creator of ChatGPT and the underlying chatbot technology that powers Microsoft’s own Copilot.

Nadella emphasized the company’s commitment to convincing customers to adopt artificial intelligence platforms in their workplaces as artificial intelligence tools transform work and work tasks.

Nadella, now in his tenth year as CEO, increased annual compensation by 63% this year to $79 million, according to a filing ahead of Microsoft’s upcoming annual shareholder meeting in December. This is despite Nadella offering to reduce his pay to reflect his personal responsibility for tackling cybersecurity threats.

Earlier this year, a scathing federal watchdog report found that Microsoft’s “cascade of security failures” allowed Chinese state-backed hackers to breach the email accounts of senior U.S. officials.