Microsoft’s Slowing Cloud Growth Casts Shadow Over Report

(Bloomberg) — Microsoft Corp. shares fell in late trading after the software giant reported decelerating demand for Azure corporate cloud-computing services, sparking concern that the company’s growth engine is losing steam after years of driving revenue.

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Investors, who sent the shares soaring 51% last year, looked past record sales — revenue topped $50 billion for the first time in a single quarter, and profit exceeded estimates for the 12th straight period. Instead they focused on the 46% increase at the company’s cloud unit, which fell short of the rosiest estimates and lagged behind gains for the two prior periods.

“In this panicky market, the Street wanted a bigger cloud upside,” said Dan Ives, an analyst at Wedbush.

Chief Executive Officer Satya Nadella has turned the company’s Azure business into a solid No. 2 behind Amazon.com Inc. in the market for cloud infrastructure services — computing power and storage delivered via the internet — and made Azure results a closely watched number. While cloud revenue has been rising steadily, Microsoft faces steep competition for big contracts from Amazon and Google, which ranks third but is pouring resources into the business as it works to catch up.

Microsoft shares dropped about 4.7% in extended trading following the report, after declining 2.7% to $288.49 at the close in New York. While the stock jumped in 2021, it has fallen 14% so far this year amid a rout in large technology stocks.

Though Azure revenue in the fiscal second quarter, which ended Dec. 31, came in below the 50% in the prior period and 51% the quarter before, demand was actually better than Microsoft had expected, Chief Financial Officer Amy Hood said in an interview.

“The continuity of the growth in Azure is actually pretty pleasing to us,” she said. “Customers are turning to Azure and the Microsoft Cloud to really fundamentally run their businesses differently.”

Overall revenue in the recent quarter climbed 20% to $51.7 billion, the Redmond, Washington-based software maker said Tuesday in a statement. That was a slight easing from the 22% gain posted in the first quarter, which was the fastest pace in four years. Second-quarter revenue was predicted to be $50.9 billion on average, according to analysts polled by Bloomberg. Net income rose to $18.8 billion, or $2.48 a share, while analysts had predicted $2.32.

“We’ve kind of hit the highest peak of growth we’re going to see in a while,” said Brent Thill, an analyst at Jefferies LLC. “You have a theme of decelerating growth and harder comps are coming up.”

The software giant is one of the first of the largest technology companies to report earnings, so investors are closely watching the results as a bellwether for results from companies like Apple Inc., which will report on Thursday, and Google parent Alphabet Inc. next week.

“Microsoft is obviously going to be considered a leader,” Thill said. “Their comments about the world will set the stage for the rest of the tech.”

Other technology stocks including Alphabet and Amazon, whose AWS cloud division is its most profitable, extended declines in late trading after Microsoft’s report.

Commercial cloud sales in the quarter rose 32% to $22.1 billion, Microsoft said. Gross margin, or the percentage of sales left after subtracting production costs, in that business narrowed slightly to 70%, the company said in a slide posted on its website. Without the impact of an accounting change, gross margin would have widened by 3 percentage points.

Intelligent Cloud sales, consisting of Azure and server software, rose to $18.3 billion, meeting the average estimate of analysts polled by Bloomberg. In the Productivity division, mostly Office, sales were also in line with $15.9 billion average prediction.

In the More Personal Computing division, including Windows, Surface and Xbox, revenue was $17.5 billion. That topped the average $16.7 billion projection.

Sales of Office 365 to business customers rose 19%. Revenue from Windows operating-system software sold to PC makers increased 25%, buoyed by strong demand for corporate machines that carry higher-priced versions of Windows, Hood said.

Shortages of semiconductors are still roiling the market for Xbox consoles and Surface devices, but Microsoft and its partners have improved their ability to manage the issues, Hood said, leading to better-than-expected supplies of both categories of hardware in the critical holiday season.

Sales of Xbox machines climbed 4% compared with the year-earlier holiday period, when the new versions of the devices launched but supply was severely limited. Revenue from Xbox content and services jumped 10% in the recent period.

Last week, Microsoft unveiled a deal to acquire Activision Blizzard for $68.7 billion, buying a legendary game publisher responsible for franchises like Call of Duty and World of Warcraft, but recently roiled by claims of sexual misconduct and discrimination. Microsoft will not update any financial information it gave about the deal today, Hood said in the interview.

(Updates with unit revenue in 14th, 15th paragraphs.)