Microsoft wipes out gains after saying Azure Growth needs to slow down

(Bloomberg) – Microsoft Corp. said revenue growth for 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 steeper decline in demand for the products that have fueled its momentum in recent years.

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Shares erased earlier gains in late trading after Chief Financial Officer Amy Hood said Azure sales in the current period would slow 4-5 points from the end of the fiscal second quarter, when gains were a percentage in the mid-1930s. That business had marked a bright spot in a lackluster earnings report for Microsoft, whose other divisions were held back by a slump in personal computer software and gaming sales. video.

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 pessimistic outlook has brought attention back to the software giant’s challenges as enterprise clients rein in 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 workers.

Earlier Tuesday, the company reported adjusted earnings for the period ending Dec. 21. 31 was $2.32 per share, while sales reached $52.7 billion. That compares with average analyst projections for $2.30 per share in earnings and $52.9 billion in revenue, according to a Bloomberg survey. Excluding currency effects, Azure revenue grew 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 last quarter, including $800 million related to job cuts, which will affect less than 5% of its workforce. The Redmond, Wash.-based company said last week the fees would include severance, “changes to our hardware portfolio” and the cost of consolidating real estate leases.

Shares of the company fell about 1% after executives gave their guidance on the conference call. Earlier they hit $254.79, after closing at $242.04 in regular New York trading. The stock has fallen 29% in 2022, compared to a 20% drop in the Standard & Poor’s 500 index.

After years of double-digit revenue gains fueled by the acceleration of Microsoft’s cloud business and robust growth during the tech spending frenzy of the Covid-19 pandemic, Chief Executive Satya Nadella acknowledged that the industry is going through a period of deceleration and will have to adjust.

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

Azure has been Microsoft’s most watched business for years and has fueled an upsurge in revenue since Nadella took over in 2014 and steered the company into the booming cloud computing market, where it competes. with Inc., Google’s Alphabet Inc. and others. Now, Microsoft is turning to artificial intelligence applications to further fuel Azure demand. Azure Machine Learning service revenue has more than doubled for five consecutive quarters, Nadella said.

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Even as Microsoft seeks to reduce 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 on Monday it would increase its stake in OpenAI, with a person familiar with the matter saying the new investment will be $10 billion over several years.

“We fundamentally believe that the next big wave of platforms will be AI,” Nadella said Tuesday. “And we also believe that a lot of business value is created just by 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 was too early to start quantifying what this would mean for Azure demand.

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

These expenses “are driven by both short-term and long-term cloud demand,” Hood said. “As we continue to see such strong demand for the cloud, you will continue to see us spending capital.” On the call with analysts, she predicted capital spending will rise in the third quarter.

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

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