By Stephen Nellis and Deborah Mary Sophia
(Reuters) -Microsoft reported slower-than-expected growth in its crucial Azure cloud business on Wednesday despite beating estimates for overall quarterly revenue and increasing use of its cloud services for artificial intelligence.
The Azure unit reported revenue growth of 31% in the quarter, missing Visible Alpha estimates of 31.8%.
Microsoft’s capital expenditures hit $22.6 billion, above analysts’ consensus estimate of $20.95 billion, according to data from Visible Alpha.
Microsoft shares dipped 1.3% on news of the higher spending and slower growth relative to Wall Street expectations.
DeepSeek’s meteoric rise in the past three weeks has sparked worries of stiff competition that could force leading U.S. AI providers to slash prices. Investors are questioning the vast sums that Microsoft, OpenAI, Alphabet, Meta Platforms and others have been spending to develop and dominate AI technology.
Microsoft said earlier on Wednesday it had added DeepSeek, the breakout Chinese AI model, to its offerings on Azure.
Microsoft said AI contributed 13 percentage points of Azure’s growth in its fiscal second quarter, up from 12 percentage points the previous quarter.
Microsoft also posted 67% growth in what it calls commercial bookings, a measure of new contracts signed with large customers.
Brett Iversen, Microsoft’s vice president of investor relations, said that figure was mostly driven by a large new Azure contract with OpenAI. While OpenAI announced a new data center deal with Oracle last week, Microsoft still retains the rights to most of the hosting of OpenAI’s models for commercial purposes.
At the company’s Intelligent Cloud unit, which includes the Azure platform, revenue rose to $25.54 billion, missing expectations of $25.76 billion.
Total revenue rose 12% to $69.6 billion in the fiscal second quarter ended December, compared with analysts’ average estimate of $68.78 billion, according to data compiled by LSEG.
Redmond, Washington-based Microsoft reported a profit of $3.23 per share, beating expectations of $3.11 per share.
(Reporting by Deborah Sophia in Bengaluru; Editing by Sriraj Kalluvila, Maju Samuel and Richard Chang)
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