:Microsoft said Wednesday it expects growth in its Azure cloud business to slow and capital spending to increase in the current quarter.

Shares of the Redmond, Washington-based company fell 3.7 percent in aftermarket trading, giving up earlier gains.

He forecasts Azure growth of 31 to 32 percent in the second quarter, lagging the 32.25 percent growth analysts expected on average, according to Visible Alpha.

Revenue from its Azure cloud business rose 33% in its fiscal first quarter, slightly ahead of estimates. The world’s largest software maker beat Wall Street estimates for quarterly revenue and profit and reiterated that demand for its artificial intelligence-based cloud was exceeding capacity.

AI contributed 12 percentage points to Azure’s growth in the quarter ended September 30, up from 11 percentage points in the previous three months.

“We continue to see demand above our current capacity,” said Brett Iversen, Microsoft’s vice president of investor relations. “The AI ​​opportunity still seems very early.”

The company expects to increase its AI capacity more significantly in the second half of the fiscal year, Iversen said, adding that whether the expansion will meet current constraints depends on the growth of the request.

The quarterly results are Microsoft’s first since the company restructured how it reports its businesses to align them more closely with how they are managed. This decision, however, made it more difficult to estimate the quarter’s performance.

Earnings per share came in at $3.30, compared with analysts’ average estimate of $3.10, according to LSEG data.

Revenue rose 16 percent to $65.6 billion in the fiscal first quarter ended September, compared with an average analyst estimate of $64.5 billion, according to LSEG.

“Microsoft’s biggest advantage among the big three (cloud) players is its ability to isolate and talk about AI,” said Brian Mulberry, client portfolio manager at Zacks Investment Management. He said Microsoft’s new reporting format provides transparency into the financial impact of AI services.

The company is considered the leader among its Big Tech peers in the AI ​​race thanks to its exclusive partnership with ChatGPT maker OpenAI. Microsoft’s Azure customers have access to OpenAI’s latest models, such as its o1 models, capable of solving complex math, science and coding problems.

Additionally, Microsoft has early access to integrate OpenAI technology into its product portfolio, such as in Bing and its enterprise applications like Excel and PowerPoint, but that effort has not gone as well as expected.

Microsoft’s rival Google has benefited from the growth of AI. On Tuesday, Alphabet said AI contributed to a 35% increase in its cloud business. Its shares closed up more than 2.8 percent on Wednesday and were down 0.5 percent after the market close.

BIG SPENDING ON AI

Microsoft’s heavy capital spending to support AI growth has raised concerns among some investors.

The company was the worst performer among big tech names this year, gaining just over 15 percent, while Meta jumped 68 percent and Amazon climbed 28 percent.

Microsoft has invested billions in building out its AI infrastructure and expanding its data center to ease capacity constraints that have hampered its ability to meet surging demand for cloud computing.

For the quarter, Microsoft said its capital spending increased 5.3 percent to $20 billion, up from $19 billion in the previous quarter. This was higher than Visible Alpha’s estimates of $19.23 billion.

The company will spend more than $80 billion this fiscal year, which began in July, according to estimates by analysts at Visible Alpha. This represents an increase of more than $30 billion from the last fiscal year.

Meta, which also reported quarterly results on Wednesday, saw its stock fall 2.5% in after-hours trading, despite revenue and profit beating analysts’ estimates, due to a warning regarding a “significant acceleration” of AI costs.

Outside of its cloud business, Microsoft reported $28.3 billion in revenue in its productivity business, which houses its Office suite of apps, 365 Copilot, and its AI and voice technology services.

Microsoft’s personal computing unit, which houses its Windows operating system as well as devices such as Surface and gaming products such as Xbox hardware, content and services, saw a 17 percent jump in its turnover at 13.2 billion dollars.