Shares of Microsoft Corp. fell sharply in extended trading today after the company reported a worrying slowdown in cloud computing revenue growth and warned that sales in the next quarter will miss expectations by around $2 billion.
Microsoft only just beat expectations with its first quarter results. It reported earnings before certain costs such as stock compensation of $2.35 per share, down from $2.71 per share in the same period a year ago, and just above Wall Street’s forecast of $2.31 per share. Revenue for the period came to $50.1 billion, up 11% from a year ago and ahead of the consensus estimate of $49.66 billion. Altogether, Microsoft racked up a fiscal first quarter profit of $17.56 billion.
“In a world facing increasing headwinds, digital technology is the ultimate tailwind,” said Microsoft Chairman and Chief Executive Satya Nadella. “In this environment, we’re focused on helping our customers do more with less, while investing in secular growth areas and managing our cost structure in a disciplined way.”
Much of Microsoft’s growth over the past few years has been driven by its Azure cloud computing business, and there have been concerns lately that it might lose steam as the U.S. enters a potential recession. Those fears seem to be justified, for Microsoft revealed that Azure revenue grew by just 35% in the first quarter, slower than the 40% growth rate it reported three months earlier, and well off the 50% growth it saw one year earlier. Azure’s revenue growth rate was the slowest Microsoft has reported in two years, since it began publishing such data. The company notably only reports percentage revenue growth for Azure, whereas rivals Amazon.com Inc. and Alphabet Inc. both provide a detailed breakdown of their cloud revenues.
The bad news was compounded when Microsoft Chief Financial Officer Amy Hood said in a conference call that Azure could see a similar sequential revenue growth decline in the current quarter. She warned that percentage growth will fall by five points on a constant-currency basis. Further, she said the company is looking into taking more cost cutting measures, having laid off less than 1,000 employees earlier in the month.
“While we continue to help our customers do more with less, we will do the same internally,” she said. “And you should expect to see our operating-expense growth moderate materially through the year while we focus on growing productivity of the significant head-count investments we’ve made over the last year.”
Hood’s words of warning came after she issued a worrying forecast for the company’s fiscal second quarter. She told analysts that Microsoft sees revenue of between $52.35 billion and $53.35 billion, below the analyst consensus of $56.16 billion. Microsoft’s Intelligent Cloud business segment, which includes Azure, is expected to do between $21.25 billion and $21.55 billion in sales, just below Wall Street’s $21.82 billion forecast.
Investors balked at the news, and Microsoft’s stock fell more than 6% in after-hours trading, erasing a gain of just over 1% earlier in the day. The report sparked concerns about the wider cloud computing industry too, with Amazon’s stock also down more than 4%.
It’s not just stalling cloud growth that Microsoft has to contend with. In addition, the company is being hurt by a strengthening U.S. dollar and a decline in personal computer sales, which had spiked during the COVID-19 pandemic. The company reported PC revenue of $13.3 billion in the quarter, which was more or less flat compared to the same period one year earlier.
The Intelligent Cloud business did $20.3 billion in revenue, up from the $16.96 billion it generated a year before, but just below Wall Street’s estimate of $20.46 billion.
As for Microsoft’s Productivity and Business Processes segment, which includes Office, Dynamics and LinkedIn, it delivered $16.5 billion in sales, up from $15.04 billion the year before.