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Microsoft Plunges on Forecast for Lackluster Azure Growth

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OCTOBER 25, 2022

Signage outside the Microsoft Campus in Redmond, Washington, U.S., on Thursday, March 3, 2022. Microsoft Corp. has begun calling employees back to its headquarters in recent weeks, but its return-to-office strategy hinges on hybrid work.

Microsoft Corp. gave a lackluster forecast for sales growth in its Azure cloud-computing services business, a closely watched measure of corporate demand, sending the shares reeling in late trading.

Revenue growth for Azure, which lets companies run and store software applications, will drop by five percentage points in the current period from the prior quarter, Chief Financial Officer Amy Hood said on a conference call Tuesday. Azure sales rose 42% in the fiscal first quarter, excluding the impact of foreign-currency exchange rates, implying a gain of 37% for the second quarter, which ends in December.

Earlier, Microsoft posted its weakest quarterly sales growth in five years, throttled by the surging U.S. dollar, slumping PC demand and faltering advertising revenue. As the global economy teeters on the brink of a recession, sales of Windows software to PC makers swooned 15% in the recent period, and Hood forecast continued challenges in PC and ad markets for the rest of the fiscal year.

On the call, Hood said demand for Azure and new contract signings both remain strong among large customers, but the software maker is helping customers to run applications and tasks more efficiently and at a lower cost. That ignited fresh concerns that demand may sputter further for Azure, which has been driving Microsoft’s resurgence as a technology powerhouse in recent years.

“The tone has definitely changed,” said Dan Morgan, a senior portfolio manager at Synovus Trust Co. “We’ve started to get a big change-up in software spending surveys — there’s a general consensus of ‘hey, you know, the economy is slowing down and we’re watching our expenses.’”

Shares slid as much as 8.1% to $230.39 in extended trading following the company’s forecast. They had risen to $250.66 at the close in New York. While the stock jumped 51% in 2021, it has fallen 25% so far this year amid a rout in large technology stocks. During the recent quarter, the company’s shares declined 9.3%, while the Standard & Poor’s 500 Index dropped 5.3%.

The Azure commentary hit particularly hard with shareholders who look to that business as a barometer of Microsoft’s future growth prospects. A few years ago, the division was doubling sales every quarter. Growth rates have slowed as total revenue became large enough to make gains of that magnitude more challenging, and Hood said the company is reaching out “proactively to customers and making sure we are helping them optimize their workloads,” particularly as the weakening economy causes customers to worry about spending.

Profit margins are also worsening because of rising energy costs, particularly in Europe, which are cutting into cloud-computing profits. Microsoft will spend an additional $800 million this year to cover the higher cost of powering data centers, particularly in Europe, Hood said. And the weakness in Windows means less revenue from what remains a very high-margin part of Microsoft’s portfolio.

The Redmond, Washington-based company will continue to invest in key strategic priorities, Hood and Chief Executive Satya Nadella said. But Microsoft will also aim to limit expenses, particularly around hiring. Hood forecast headcount increases will be minimal during the current quarter. The company has already had two small rounds of job cuts, and has eliminated many open roles in a bid to slow hiring.

Sales in the first quarter, which ended Sept. 30, rose 11% to $50.1 billion. Net income was $17.6 billion, or $2.35 a share. On average, analysts had estimated fiscal first-quarter sales of $49.6 billion and profit of $2.29 a share, according to a Bloomberg survey. Demand remained strong for cloud services, with Office 365 sales to businesses performing slightly better than expected, and the majority of large customers that signed up for Microsoft 365 licenses opting for the higher-end version, Hood said.

“While we are not immune, of course, from macroeconomic impacts, we really feel good about the businesses we are investing in, the strong growth rate, the position in the market,” Hood said.


Courtesy/Source: Bloomberg Businessweek

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