Microsoft erases gains after saying Azure's growth has slowed

Microsoft erases gains after saying Azure’s growth has slowed

(Bloomberg) — Microsoft 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, raising concerns about a sharp decline in demand for products that have been driven by momentum in recent years.

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The stock erased previous gains in late trading after Chief Financial Officer Amy Hood said Azure sales in the current period would slow by 4 or 5 points from the end of the fiscal second quarter, when percentage gains were in the mid-30s. The business was a bright spot in a lackluster earnings report for Microsoft, whose other divisions have been held back by sluggish sales related to personal computer software and video games.

Shareholders had earlier raised the shares more than 4%, encouraged by signs of resilience in Microsoft’s cloud business even in a generally weaker market for software and other technology products. The company’s gloomy outlook has shifted focus back to the software giant’s challenges as corporate customers pressure to spend. Revenue growth of 2% in the second quarter was the slowest in six years, and Microsoft said last week it would fire 10,000 workers.

Earlier 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 with analysts’ median forecasts of $2.30 per share in earnings and $52.9 billion in revenue, according to a Bloomberg survey. Excluding currency effects, Azure revenue rose 38% for the full quarter, slightly beating analyst expectations.

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

Shares of the company fell about 1% after executives presented their forecasts on the conference call. Earlier, they rose to $254.79, after closing at $242.04 in regular New York trading. The stock is down 29% in 2022, compared to a 20% decline in the S&P 500.

After years of double-digit revenue gains fueled by Microsoft’s accelerating cloud business, and strong growth during the tech spending spree of the Covid-19 pandemic, CEO Satya Nadella has acknowledged that the industry is going through a slowdown and will need to adjust.

“During the pandemic there has been a rapid acceleration. 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 will have to do more with less. – We’ll have to show our own productivity gains with our 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 steered the company into the booming cloud computing market, where it competes with Inc. Alphabet Inc. Google and others. Microsoft is now turning to AI applications to drive demand for Azure. Nadella said revenue from Azure Machine Learning has more than doubled for five consecutive quarters.

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Hood said in an interview that even as Microsoft seeks to cut spending on people 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, with a person familiar with the matter saying 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 on Tuesday. “We also firmly believe that a lot of enterprise value is created simply by being able to catch these waves and then impact these waves on every part of our technology stack and also create new solutions and opportunities.” He said it’s too early to start defining what that will mean for an Azure application.

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

Hood said that this spending is “dictated by both the demand for the cloud in the near and long term.” “As we continue to see this strong demand for cloud, you will continue to see us spend on capital.” On the call with the analysts, I expected capex to increase in the third quarter.

Read more: OpenAI and GitHub AI tools draw legal scrutiny over fair use

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

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