(Reuters) -Microsoft said on Wednesday it expects growth for its cloud business Azure to slow and capital expenditures to rise during the current quarter.

Shares of the Redmond, Washington-based company dipped 3.7% in after-market trading, giving up earlier gains. 

It forecast second-quarter Azure growth of 31% to 32%, lagging the 32.25% growth expected on average by analysts, according to Visible Alpha.

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

AI contributed 12 percentage points to Azure's growth in the quarter ended Sept. 30, compared with 11 percentage points in the prior three-month period.

"We continue to see more demand than our current capacity," said Brett Iversen, Microsoft's vice president of investor relations. "The AI opportunity still feels really early."

The company expects to more noticeably bring on AI capacity in the second half of the fiscal year, Iversen said, adding that whether expansion will address current constraints depends on the growth in demand.

 The quarterly earnings are Microsoft's first since it restructured the way it reports its businesses to align them more closely with how they are managed. That move has, however, made it harder to estimate the quarter's performance.

Earnings per share stood at $3.30, compared with analysts' average estimate of $3.10, according to LSEG data. 

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

"Microsoft's clear lead amongst the three big (cloud) players is their ability to isolate and talk about AI," said Brian Mulberry, client portfolio manager at Zacks Investment Management. He said Microsoft's new reporting format was providing transparency for AI services' financial impact.

The company is seen as the leader among Big Tech peers in the AI race thanks to its exclusive partnership with ChatGPT maker OpenAI. Microsoft's Azure customers get access to OpenAI's latest models, such as its o1 models, capable of answering challenging math, science and coding problems. 

In addition, Microsoft gets early access to infuse OpenAI's technology across 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 AI growth. On Tuesday, Alphabet said AI helped drive a 35% surge in its cloud business. Its shares closed up over 2.8% on Wednesday and were down 0.5% after the market closed.

BIG AI SPENDING

Microsoft's hefty capital spending to support its AI growth has raised concerns among some investors.

The company has been the worst performer among Big Tech names this year, having gained just over 15%, while Meta has surged 68% and Amazon climbed 28%.

Microsoft has been pouring billions into building its AI infrastructure and expanding its data-center footprint to ease capacity constraints that have hampered its ability to meet the surge in cloud-computing demand.

For the quarter, Microsoft said capital expenditures rose 5.3% to $20 billion, compared with $19 billion in the previous quarter. That was higher than Visible Alpha estimates of $19.23 billion. 

The company will spend over $80 billion this fiscal year, which began in July, according to analyst estimates from Visible Alpha. That is an increase of more than $30 billion from its last fiscal year.

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

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

Microsoft's personal-computing unit, home to its Windows operating system as well as devices including Surface and gaming products including Xbox hardware, content and services, reported a 17% rise in revenue to $13.2 billion. 

(Reporting by Deborah Sophia in Bengaluru and Anna Tong in San Francisco; Editing by Anil D'Silva and Rod Nickel)