TMTPOST -- Microsoft Corporation shares settled around 6.1% lower Thursday for their biggest daily loss since October 26, 2022, when they dropped 7.7%. Shares suffered their worst day most in two years after Microsoft released record high quarterly earnings while flagging slowdown in sales amid ongoing artificial intelligence (AI) spending balloon.

Credit:Microsoft

Microsoft recorded revenue of $65.6 billion for the first fiscal quarter ended September 30 with a year-over-year (YoY) increase of 16%, topping Wall Street projection of $64.51 billion. Diluted earnings per share (EPS) also beat expectation with $3.30, up 10% YoY.

Microsoft Cloud delivered stronger-than-expected growth for the September quarter, highlighting the AI drive. Cloud is the business of tech giants that is currently most evidently benefiting from generative AI applications as their investments in developing AI helped drive demand for cloud services.

Revenue from Microsoft Cloud surged 22% YoY to $38.9 billion, compared with analysts' forecast of $38.11 billion. Intelligent Cloud generated $24.09 billion with a 20% YoY increase, beating estimated $26.74 billion. Out of the segment, revenue from the cloud infrasture business Azure and other other cloud services jumped 34% YoY in constant currency free from the influence of the foreign currency exchange rate fluctuation. That implied the revenue grew a little bit slowly from the 35% YoY increase for the previous quarter. But the revenue growth of Azure still better than analysts estimated growth of 30.4%.

Microsoft said AI contributed 12 percentage points to Azure revenue growth for the September quarter, more than the contribution of 11 percentage points three months ago. "Strong execution by our sales teams and partners delivered a solid start to our fiscal year with Microsoft Cloud revenue of $38.9 billion, up 22% year-over-year," said Amy Hood, executive vice president and Chief Financial Officer (CFO) of Microsoft.

"We are expanding our opportunity and winning new customers as we help them apply our AI platforms and tools to drive new growth and operating leverage," CEO Satya Nadella said in the earnings release.

Microsoft continued aggressive spending on AI. Capital expenditure, or Capex, including assets acquired under finance leases soared 78.6% to $20 billion, after a 77.6% YoY increase in Capex for the second quarter. Microsoft said the Capex aims to support demand in its cloud and AI offerings. Of its cloud and AI expenditures, roughly half was for long-lived assets. Cash paid for property and equipment was $14.9 billion with a 50.7% surge, while analysts expected to be $14.55 billion, up 47% YoY.

In comparison the beat both top and bottom line, Microsoft provided more cautious outlook for the fourth quarter. The management said on a call with analysts that revenue for the quarter ended in December would be in the range of $68.1 billion to $69.1 billion, suggesting 10.6% growth at the middle of the range. Analyts were looking for revenue of $69.83 billion. In constant currency, Azure revenue will come in at 31% to 32% in the fiscal second quarter, slowing down from 34% for the September quarter. That growth rate fell short of analysts projected 32.25%. Intelligent Cloud revenue is expected to be $25.55 billion to $25.85 billion, representing a YoY decline range of 0.1% to 1.3%.

Microsoft will continue ramp up investments in AI infrastructure, according to the earnings call. CFO Hood said Microsoft expects its second-quarter cloud gross margin percentage to be down from last year, "driven by the impact of scaling our AI infrastructure." She added that capital expenditures to increase "on a sequential basis given our cloud and AI demand signals."