Microsoft gives downbeat outlook after signs of softer cloud demand

Software group’s main growth engine slows further as clients grow more cautious amid economic uncertainty. Please use the sharing tools found via the share button at the top or side of articles. Microsoft issues downbeat outlook. It is against FT.com’s terms and conditions and copyright policy to share articles. To acquire additional rights, send an email to licensing@ft.com. Using the gift article service, subscribers can share up to ten or twenty articles per month. You can learn more about the tour at https://www.ft.com/tour.
According to Microsoft’s report on Tuesday, demand for cloud services decreased significantly in December as consumers became more wary of the economic slowdown. https://www.ft.com/content/4c161602-4637-4257-8838-b51c2a5c00fe

After what had otherwise been a surprisingly strong final quarter, the software giant issued a downbeat forecast for the current quarter due to signs of softer demand as the year came to a close. This added to the nervous atmosphere on Wall Street at the start of the tech earnings season. In after-hours trading, Microsoft’s shares fell 1%, while Amazon, Microsoft’s main cloud rival, lost 2%.

Microsoft’s main growth engine is clearly slowing down, according to chief executive Satya Nadella, who stated that customers were working to “optimise” their spending on existing contracts and that there would be a “lag” before they started spending more on their next cloud projects.

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https://www.ft.com/content/4c161602-4637-4257-8838-b51c2a5c00fe The company predicted that revenue would range from $50.5 billion to $51.5 billion in the current quarter. This was only a 3% increase from the previous year and was approximately $1.5 billion lower than what analysts had predicted at the middle of the guidance range. From the 2% growth seen in the final months of last year, which was regarded as the low point in the cycle, Wall Street had been anticipating a quicker recovery.

Last week, when the company said it would cut 10,000 jobs, or nearly 5% of its workforce, Nadella’s latest remarks echoed his cautious tone. He did, however, sound a bullish note on a coming wave of growth from artificial intelligence, speaking the day after Microsoft said it was betting billions of dollars on deepening its ties with OpenAI, the company that makes the ChatGPT bot. He stated, “We fundamentally believe that AI will be the next platform wave.”

Growth in Microsoft’s cloud computing business slowed further in the final months of the year, but it still performed better than the software company and many analysts had anticipated. In the three months leading up to the end of the year, revenue from its Azure cloud services had increased by 38% prior to the impact of currency fluctuations. That was higher than the anticipated 37%, despite being lower than the previous quarter’s 42%. Azure’s revenue increased by 31%, taking into account the effects of the stronger dollar.

Microsoft’s shares rose 4% as a result of the news, but an hour later, the earnings forecast wiped out the gain.

As Microsoft’s traditional PC software experiences a significant cyclical downturn, the cloud business has emerged as the primary revenue generator. As customers sought to optimize their cloud spending, cloud growth in the preceding quarter slowed more than anticipated, raising concerns of a further slowdown.

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Amy Hood, Microsoft’s chief financial officer, stated in https://www.ft.com/content/4c161602-4637-4257-8838-b51c2a5c00fe that Azure’s percentage growth had dropped to the “mid-30s” by the end of the year and was likely to drop another 4-5 points in the upcoming six months, the second half of Microsoft’s fiscal year. However, despite losing a significant portion of high-margin software sales as a result of the decline in PC demand, she stated that the company still only expected its operating profit margin to slip 1%.

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https://www.ft.com/content/4c161602-4637-4257-8838-b51c2a5c00fe A $1.2 billion charge from job cuts and a sharp slowdown in PC software business growth led to a 11% decrease in net income to $16.4 billion in the most recent quarter. Net income, excluding the charge, increased slightly to $2.32 per share from $17.4 billion, or 7% below the $2.29 that Wall Street had anticipated.

The most recent quarter, the second of Microsoft’s fiscal year, saw revenue rise 2% to $52.7 billion, exceeding expectations of $53 billion.

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