Microsoft erases gains after saying Azure growth is slowing

(Bloomberg) — Microsoft Corp said revenue growth in its Azure cloud computing business would slow in the current period and warned that sales of its enterprise software would slow further, raising concerns about a sharper drop in demand for the products. momentum in recent years.

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The stock erased earlier gains in late trading after Chief Financial Officer Amy Hood said current-period Azure sales would slow 4 or 5 points from the end of the second fiscal quarter, when earnings were in the mid-30s percent. The business marked a bright spot in Microsoft’s lackluster earnings report, which was held back by declining sales of its other divisions, PC software and video games.

Shareholders had previously rallied shares 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 negative outlook put the spotlight back on the software giant’s woes as corporate customers put the brakes on spending. Second-quarter revenue growth of 2% was the slowest in six years, and Microsoft said last week it was cutting 10,000 jobs.

On Tuesday, the company said adjusted earnings for the period ended Dec. 31 were $2.32 a share, while sales rose to $52.7 billion. That compared with an average of analysts’ forecasts for earnings of $2.30 and revenue of $52.9 billion, according to a Bloomberg survey. Excluding currency effects, Azure revenue rose 38% for the full quarter, slightly beating analysts’ forecasts.

Microsoft said it recorded a charge of $1.2 billion, or 12 cents per share, in the latest quarter, $800 million of which was related to job cuts that will affect less than 5% of employees. The Redmond, Wash.-based company said last week that the payout will cover severance costs, “changes in our equipment portfolio” and the consolidation of real estate leases.

The company’s shares fell about 1% after executives released their forecasts on the conference call. Earlier, they had risen to $254.79 after closing at $242.04 in regular New York trading. Stocks are down 29% in 2022, compared with a 20% decline in the Standard & Poor’s 500 Index.

After years of double-digit revenue growth driven by Microsoft’s accelerating cloud business and strong growth in tech spending amid the Covid-19 pandemic, CEO Satya Nadella acknowledged the industry is going through a period of slowdown and will need to. adjust.

“There was a rapid acceleration during the pandemic. I think we’re going to go through a phase where demand is somewhat normalized today,” 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 productivity with our technology.”

Azure has been Microsoft’s most closely watched business for years, and since Nadella took the helm in 2014 and led the company to Inc., Alphabet Inc. has boosted its revenue growth again after focusing on the cloud computing market that competes with . Google etc. Now, Microsoft is turning to AI applications to drive demand for Azure. Revenue from the Azure Machine Learning service has more than doubled for five consecutive quarters, Nadella said.

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

“We fundamentally believe that the next big platform wave will be AI,” Nadella said Tuesday. “And we also believe that a lot of enterprise value is created just by catching those waves and then having those waves affect every part of our technology stack, creating new solutions and new opportunities.” He said it’s too early to begin assessing what this means for Azure demand.

The software maker also plans to continue spending to expand data centers that provide cloud services.

Those costs are “dictated by both near-term and long-term cloud demand,” Hood said. “Given that we continue to see such strong demand in the cloud, you will continue to see us spend on capital.” Speaking to analysts, he predicted an increase in capital spending in the third quarter.

Read more: OpenAI, GitHub Conducts Fair Use Legal Review of AI Tools

(Updates to add details about the business of AI in the ninth paragraph.)

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