Microsoft wipes out profits after plans to slow Azure growth

Microsoft wipes out profits after plans to slow Azure growth

(Bloomberg) — Microsoft Corp. said revenue growth at 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 deeper decline in demand for the products it propelled have gained momentum in recent years.

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Shares shed earlier gains in late trade after Chief Financial Officer Amy Hood said Azure sales in the current period will slow 4 or 5 points from the end of the fiscal second quarter, when gains hit a percentage in the mid-30s . That deal had marked a bright spot in a lackluster earnings report for Microsoft, whose other businesses were held back by a slump in sales related to PC software and video games.

Shareholders had previously sent the stock up more than 4%, bolstered by signs of resilience in Microsoft’s cloud business, even in a weaker overall market for software and other technology products. The company’s bearish outlook put focus back on the software giant’s challenges as enterprise customers put the brakes on spending. Revenue growth of 2% in the second quarter was the slowest in six years, and Microsoft announced last week that it was laying off 10,000 employees.

Earlier Tuesday, the company said that adjusted earnings per share for the period ended December 31 were $2.32 on revenue increased to $52.7 billion. That compares to average analyst forecasts of $2.30 in earnings per share and $52.9 billion in revenue, according to a Bloomberg poll. Excluding currency, Azure revenue rose 38% for the full quarter, slightly beating analysts’ forecasts.

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

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Shares of the company fell about 1% after executives provided guidance on the conference call. Earlier, they surged 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% decline in the Standard & Poor’s 500 Index.

After years of double-digit revenue growth fueled by Microsoft’s accelerating cloud business and robust growth during the tech spending wave of the Covid-19 pandemic, Chief Executive Officer Satya Nadella acknowledged the industry is going through a period of slowdown and this also needs to adjust.

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

Azure has been Microsoft’s most closely watched company for years and has fueled a resurgence in revenue since Nadella took the helm in 2014 and focused the company on the burgeoning cloud computing market, where it partnered with Inc., Alphabet Inc. competes. ‘s Google and others. Now Microsoft is turning to artificial intelligence applications to drive demand for Azure. Revenue from the Azure Machine Learning service more than doubled for the fifth straight quarter, Nadella said.

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Even as Microsoft tries to cut spending 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 would increase its stake in OpenAI, with a person familiar with the matter saying the new investment would total $10 billion over several years.

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

The software maker also plans to continue investing in expanding the data centers that provide cloud services.

That spend “is driven by both near-term and long-term cloud demand,” Hood said. “As we continue to see such strong demand for the cloud, you will continue to see how we spend on capital.” Speaking to analysts on the phone, she predicted that capital spending will increase in the third quarter.

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(Updates to add AI deal details in ninth paragraph.)

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