Microsoft Erases Gains After Saying Azure Growth to Decelerate

(Bloomberg) — Microsoft Corp. said revenue growth in its Azure cloud-computing business will slow in the current period and warned of a further slowdown in corporate software sales, fueling concerns about a sharp decline in demand for the products. Accelerated in recent years.

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Chief Financial Officer Amy Hood said Azure sales will slow by 4 or 5 points in the current period from the end of the fiscal second quarter, when the stock erased earlier gains in late trading when the gain was in the mid-30s percent. That business marked a bright spot in a weak earnings report for Microsoft, whose other divisions were hampered by a slowdown in sales related to personal computer software and video games.

Shareholders had earlier sent the stock up more than 4%, encouraged by signs of resilience in Microsoft’s cloud business, despite a weak overall market for software and other technology products. The company’s downbeat forecast focused on the software giant’s challenges as corporate customers hit the brakes on spending. Revenue growth of 2% in the second quarter was the slowest in six years, and Microsoft said last week it was laying off 10,000 workers.

Earlier Tuesday, the company said adjusted profit was $2.32 per share in the period ended Dec. 31, while sales rose to $52.7 billion. That compared with average analyst estimates of $2.30 in earnings per share and $52.9 billion in revenue, according to a Bloomberg survey. Excluding currency effects, Azure’s revenue for the full quarter rose 38%, slightly topping analysts’ forecasts.

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Microsoft said it took a charge of $1.2 billion, or 12 cents per share, in the latest quarter, $800 million of which was related to job cuts, which will affect less than 5% of its workforce. The Redmond, Washington-based company said last week that the charge would include the cost of severance, “changes to our hardware portfolio” and consolidating real estate leases.

The company’s shares fell nearly 1% after executives gave their forecast on a conference call. Earlier, they were as high as $254.79 after closing at $242.04 in regular New York trading. The stock fell 29% in 2022, compared with a 20% slide in the S&P 500 index.

After years of double-digit revenue growth fueled by Microsoft’s booming cloud business and strong growth during the outbreak of the Covid-19 pandemic in technology spending, Chief Executive Officer Satya Nadella acknowledged that the industry is going through a period of slowdown and will need to. Arrange

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“There was a rapid acceleration during the pandemic. I think we are going to go through a phase today where there is some degree of normalization in demand,” Nadella said in an interview at the World Economic Forum in Davos, Switzerland, earlier this month. “We have to do more with less – we have to demonstrate our own productivity benefits with our own technology.”

Azure has been Microsoft’s most closely watched business for years, and has fueled a resurgence in revenue since Nadella took the helm in 2014 and reoriented the company around the growing cloud-computing market, where it competes with Amazon.com Inc., Alphabet Inc. compete with. of Google and others. Now Microsoft is turning to artificial intelligence applications to drive more demand for Azure. Azure machine learning service revenue has more than doubled for five consecutive quarters, Nadella said.

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Even as Microsoft looks to cut costs on employees and real estate, the company will continue to invest in long-term opportunities, Hood said in an interview. As part of its focus on artificial intelligence, Microsoft said Monday it would increase its stake in OpenAI, with a person familiar with the matter saying the new investment would amount to $10 billion over several years.

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“We fundamentally believe that the next big platform wave will be AI,” Nadella said on Tuesday. “And we also strongly believe that a large part of the enterprise value is created just by being able to catch these waves and then those waves affect every part of our tech stack and also create new solutions and new opportunities.” He said it’s too early to begin quantifying what that will mean for Azure demand.

The software maker also plans to continue spending on expanding data centers that deliver cloud services.

That cost is “determined by both near-term and long-term cloud demand,” Hood said. “Given that we continue to see such strong demand for cloud, you’re going to see us spend on capital.” On a call with analysts, she predicted that capital spending would increase in the third quarter.

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(Updates to add details on the AI ​​business in the ninth paragraph.)

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