Microsoft echoed earnings saying Azure growth is slowing

(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 enterprise software sales, fueling concerns about a sharper decline in demand for the products that have lost momentum in recent years years.

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Stocks erased previous gains in late trading after Chief Financial Officer Amy Hood said Azure sales will slow 4 or 5 points in the current period from the end of the fiscal second quarter, when mid-1930s earnings dropped a percentage. amounted. That company was a bright spot in a meager earnings report for Microsoft, whose other divisions were held back by a slump in PC software and video game sales.

Shareholders had previously pushed the stock up more than 4%, encouraged by signs of resilience in Microsoft’s cloud business, even in a weaker overall market for software and other technology products. The company’s gloomy forecast returned focus to the software giant’s challenges as enterprise customers slammed the brakes on their spending. Second-quarter revenue growth of 2% was the lowest in six years, and Microsoft said last week it would lay off 10,000 employees.

Earlier on Tuesday, the company said adjusted earnings for the period ended Dec. 31 were $2.32 per share, while sales rose to $52.7 billion. That compares to average analyst projections for $2.30 per share in earnings and $52.9 billion in revenue, according to a survey by Bloomberg. Excluding currency effects, Azure revenue grew 38% for the full quarter, slightly ahead of analysts’ forecasts.

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

Shares of the company fell about 1% after executives made their prediction on the conference call. Previously, they rose as high as $254.79 after closing at $242.04 in regular New York trading. The stock fell 29% in 2022, compared to a 20% drop in the Standard & Poor’s 500 Index.

After years of double-digit revenue growth fueled by Microsoft’s accelerating cloud business, and robust growth amid technology spending driven by the Covid-19 pandemic, Chief Executive Officer Satya Nadella acknowledged that the industry is going through a period of slowdown and will need to adapt .

“During the pandemic, there was rapid acceleration. I think today we are going through a phase where demand is somewhat normalizing,” Nadella said in an interview at the World Economic Forum in Davos, Switzerland, earlier this month. “We’re going to have to do more with less – we’re going to have to show our own productivity gains with our own technology.”

Azure has been Microsoft’s most-watched company for years and has fueled a resurgence in revenue since Nadella took over in 2014 and oriented the company towards the fast-growing cloud computing market, where it competes with Inc., Alphabet Inc. ‘s Google and others. Now Microsoft is turning to artificial intelligence applications to drive more demand for Azure. Revenue from the Azure Machine Learning service has more than doubled for five consecutive quarters, Nadella said.

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Even as Microsoft tries to cut back on staff 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 will increase its stake in OpenAI, with a person familiar with the matter saying the new investment will reach $10 billion over several years.

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

The software maker also plans to continue expanding its data centers that provide cloud services.

That expenditure “is driven by both short-term and long-term demand for cloud services,” Hood said. “As we continue to see such strong demand for cloud, you will continue to see us spend on capital.” Speaking to analysts, she predicts capital spending will increase in the third quarter.

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(Updates to add details on AI matters in paragraph 9.)

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