Microsoft reports quarterly sales up 16% to $65.6 billion as investors ask if AI spending worth it

Microsoft on Wednesday reported its quarterly sales grew 16% to $65.6 billion as the company sought to assure investors its huge 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 required to develop AI technology that can compose documents, make images and serve as a lifelike personal assistant at work or home.

As a result, AI-related products are now on track to contribute about $10 billion to the company's annual revenue, the "fastest business in our history to reach this milestone," CEO Satya Nadella said on a call with analysts Wednesday.

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

Analysts polled by FactSet Research were expecting Microsoft to earn $3.10 per share on revenue of $64.6 billion.

Microsoft hasn’t yet formally reported revenue specifically from AI products but says it has infused the technology and its AI assistant, called Copilot, into all of its business segments, particularly its Azure cloud computing contracts.

Leading in sales for the quarter was Microsoft's productivity business segment, which includes its Office suite of email and other workplace products, growing 12% to $28.3 billion.

Microsoft's cloud-focused business segment grew 20% from the same time last year to $24.1 billion for the three months ending Sept. 30.

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

Microsoft and the computer makers that run its Windows operating system also this year unveiled a new class of AI-imbued laptops as the company confronts heightened competition from Big Tech rivals in pitching generative AI technology to consumers and workplaces.

Building and operating AI systems is costly and Microsoft reported spending $20 billion over the quarter, mostly for its cloud computing and AI needs. That includes building energy-hungry computing centers and supplying them with specialized chips to train and run AI models.

Microsoft has also invested billions of dollars in AI startups, particularly its partner OpenAI, maker of ChatGPT and the underlying chatbot technology on which Microsoft’s own Copilot is based.

Nadella emphasized the company's push to get customers applying AI platforms in their workplaces as AI tools transform jobs and work tasks.

Nadella, now in his tenth year as CEO, saw his annual compensation increase 63% this year to $79 million, according to a statement filed ahead of Microsoft's upcoming annual shareholder meeting in December. That's despite Nadella offering to have his cash incentive reduced to reflect his personal accountability for handling cybersecurity threats.

Earlier this year, a scathing report by a federal review board found "a cascade of security failures" by Microsoft let Chinese state-backed hackers break into email accounts of senior U.S. officials.