Photo Credit: Tawanda Razika from Pixabay

Microsoft (Nasdaq: MSFT) announced stellar quarterly results today which were clouded by a big outage that the company was still trying to fix till last evening. Microsoft saw big gains in its Azure and AI segment as it ironed out a new deal with OpenAI that has been a cause of concern among the two giants.

Microsoft’s Financials

Microsoft’s first quarter revenues grew 18% to $77.67 billion, beating analyst estimates of $75.33 billion. EPS of $4.13 also exceeded analyst estimates of $3.67 per share.

Its Intelligent Cloud unit, which includes Azure, saw revenues grow 28% to $30.9 billion, ahead of the market’s estimate of $30.25 billion. Azure reported a growth of 38% during the quarter. Microsoft’s Productivity and Business Processes segment delivered revenues of $33 billion compared with the estimate of $32.33 billion. The More Personal Computing unit saw revenues grow 4% to $13.8 billion, ahead of the $12.83 billion consensus.

Microsoft did not provide estimates. The market expects revenues of $79.73 billion and an EPS of $3.78 for the second quarter. For the current fiscal year, revenues are expected to be $321.25 billion with an EPS of $15.40.

Microsoft’s OpenAI Partnership

During the year, Microsoft and OpenAI have had partnership issues, and some of those are likely to be resolved in the coming year. Earlier this week, OpenAI announced a restructuring that converted it to a for-profit business from an earlier nonprofit standing. OpenAI’s for-profit arm is now a public benefit corporation called OpenAI Group PBC. Under the new structure, Microsoft, which had invested over $13 billion in OpenAI, now holds 27% of the company valued at $135 billion.

Despite the change in structure, OpenAI will remain Microsoft’s frontier model partner and Microsoft will continue to have exclusive IP rights and Azure API exclusivity until Artificial General Intelligence (AGI). One of the key points of contention in the deal has been the trigger when OpenAI achieves AGI status. As per the new rules, once AGI is declared by OpenAI, the declaration will be verified by an independent expert panel.

Additionally, Microsoft’s IP rights for both models and products are extended through 2032 and now include models post-AGI. Microsoft’s IP rights to research will remain until either the expert panel verifies AGI or through 2030. Microsoft can also now independently pursue AGI alone or in partnership with other third parties. In exchange, OpenAI has contracted to purchase an incremental $250 billion of Azure services, but Microsoft will no longer have a right of first refusal to be OpenAI’s compute provider. The deal now keeps the two firms working together until 2032 at least. Prior to the deal, OpenAI was constrained in its ability to raise funds from outside investors and secure computing contracts. The requirement that OpenAI rely exclusively on Microsoft for computational resources was one of the big areas of concern for OpenAI.

Besides its OpenAI partnership, Microsoft remains committed to AI investment. For the three months ended September, Microsoft reported spending nearly $35 billion on new projects especially data centers. Currently, the demand for Microsoft’s cloud computing services far exceeds its available data centers, hence the rush for expansion.

My Take

Microsoft and OpenAI have concluded a deal until 2032. This tells me their AGI timeline is 3-8 years. Good to know. Governments better get UBI figured out in that timeframe or social unrest will destabilize society completely.

On the upside, medical and scientific research should explode and accelerate the cure for all diseases scenario. Personalized tutoring, mentoring, education and healthcare should also scale rapidly.

Its stock is currently trading at $541.55 with a market capitalization of $4.03 trillion. It hit a 52-week high of $555.45 yesterday after results. It has been climbing from the 52-week low of $344.79 that it had fallen to in April this year.

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