Microsoft Corp said revenue growth from its Azure cloud-computing business will fall short of Wall Street expectations and warned of further slowdown in corporate sales, hinting at a steeper decline in demand for the products that have been driving its momentum in recent years.
Microsoft said its third-quarter intelligent cloud revenue would be $21.7 billion to $22 billion, while analysts had forecast $22.14 billion.
Shares erased earlier gains in late trading on Tuesday after Chief Financial Officer Amy Hood said Azure sales in the current period will slow by 4 or 5 points from the end of the fiscal second quarter, when gains were at a percentage in the mid-30s. Cloud was a bright spot in a lacklustre earnings report of the company. Other divisions of the company were held back by a slump in sales related to personal computer software and video games.
Shareholders had earlier sent the stock up more than 4 percent on signs of resilience in Microsoft’s cloud business. The company’s downbeat forecast brought the focus back to its challenges as corporate customers hit the brakes on spending. Revenue growth of 2 percent in the second quarter was the slowest in six years, and Microsoft last week said it’s firing 10,000 workers.
The company said adjusted profit in the three months to December 31 was $2.32 a share, while sales rose to $52.7 billion. That compared with average analysts’ projections for $2.30 a share in earnings and $52.9 billion in revenue, according to a survey. Excluding currency impacts, Azure revenue gained 38 percent for the full quarter, slightly topping analyst predictions.
The company’s shares declined about 1 percent after executives gave their forecast on the conference call. Earlier, they rose as high as $254.79, after closing at $242.04 in regular New York trading. The stock dropped 29 percent in 2022, compared with a 20% slide in the Standard & Poor’s 500 Index.
Azure could get a boost from cloud spending from the growth of artificial intelligence. "There's a variety of ways that we can bring that technology either in specific offerings or to improve existing offerings," said Brett Iversen, Microsoft's head of investor relations, referring to OpenAI, in which the company is investing heavily.
OpenAI is behind the chatbot sensation ChatGPT which can spit out a love story in the style of Shakespeare or other prose with a text command. That model has been built with computing time on Azure as well.
“Given the challenges of the current macroeconomic environment and the concerns that things could have been much worse, I think you have to consider these Microsoft earnings a reasonably positive sign for tech overall," said Bob O'Donnell of TECHnalysis Research.
Azure has been Microsoft’s most closely watched business for years, and has fuelled a resurgence in revenue since Satya Nadella took the helm in 2014 and oriented the company around the burgeoning cloud-computing market, where it competes with Amazon.com Inc, Alphabet Inc’s Google and others. Now Microsoft is turning to artificial intelligence applications to fuel more Azure demand. Revenue from the Azure Machine Learning service has more than doubled for five quarters in a row, Nadella said.
Azure ended 2022 with 30 percent share in the cloud computing market, up from 20 percent in 2018, according to estimates from BofA Global Research. AWS dropped to 55 percent from 71 percent during the same period.
Azure growth has slowed steadily from around 50 percent a little over a year ago, but investors had feared worse. Shares of Amazon rose 3.25 percent after the Microsoft results.