Cloud revenue growth is helping to offset Microsoft’s slowdown

Microsoft reported its slowest growth in five years in the first quarter of fiscal 2023, largely due to a strong U.S. dollar and continued declines in PC sales, which led to a 14% drop in net income to $17.56 billion in compared to this time last year.

However, the company was still able to post an 11% rise in total revenue to $50.1 billion in the three months ended Sept. 30, thanks to the continued strength of its cloud computing services, which topped $25 billion in quarterly revenue. 24%.

The announcement sent Microsoft shares down 5.65% in early morning trading on the Nasdaq on Wednesday.

Speaking to analysts after the financial results were released, Microsoft CFO Amy Hood said the company had a strong start to its fiscal year and that the results “were in line with our expectations, even though we saw many of the macro trends from the end of the fourth quarter continue to weaken during the first quarter,” it said. in a transcript from Seeking Alpha.

Hood also noted that foreign exchange rates impacted the company’s results, and that due to the strengthening of the US dollar, conversion from other currencies reduced the company’s total revenue by five percentage points.

Microsoft segment results

Microsoft has seen its productivity and business process segment that includes Office software productivity growth of 9% in the quarter to $16.5 billion.

Revenue from Office commercial products and cloud services increased 7%, driven by 11% growth in Office 365 Commercial revenue, while Office consumer products and cloud services revenue also increased 7%, with Microsoft 365 Consumer subscribers growing to 61.3 million.

Elsewhere in this segment, LinkedIn revenue increased 17%, while revenue from dynamic products and cloud services increased 15%, mainly due to Dynamics 365 revenue growth of 24% this quarter.

The company’s intelligent cloud segment also grew during the quarter, up 20% to $20.3 billion. The segment includes Azure public cloud for hosting applications, SQL serverWindows Server and Enterprise Services.

Revenue from Azure and other cloud services increased 35%, leading to a 22% increase in total Microsoft server products and cloud services revenue.

Speaking on the same call with analysts, Microsoft CEO Satya Nadella said moving to the cloud is the best way for organizations to do more at a time when budgets and resources are tight.

“This helps them align their costs with demand and reduce the risks associated with rising energy costs and supply chain constraints,” Nadella said, adding that Microsoft has also seen more customers turn to the company’s cloud services to build and innovate. with the infrastructure they already have.

In a trend that mimics Microsoft’s fourth-quarter 2022 results, the company’s more personal computing segment saw a slight decline in revenue totaling $13.3 billion.

While revenue from Windows commercial products and cloud services rose 8%, and Nadella told analysts that Microsoft is seeing nearly 20% more active Windows devices each month than before the pandemic, Windows OEM revenue fell 15% , which is caused by a decrease in the supply of PCs and tablets as highlighted by IDC the last month.

Demand for PCs is expected to weaken

The IDC report predicts that the overall PC and tablet market will decline by 2.6% in 2023 as a result of inflation, a weakening global economy and a surge in purchases over the past two years. According to IDC, consumer demand has slowed, demand for education is largely satisfied, and business demand is being squeezed by worsening macroeconomic conditions.

Microsoft’s gaming revenue forecast also faces challenges, with revenue from Xbox content and services falling 3% in the quarter. This could potentially get worse next year, with the US Federal Trade Commission (FTC) and the UK Competition and Markets Authority (CMA) announcing that acquisition investigation for possible violations of antimonopoly legislation.

“In a world facing increasing headwinds, digital technology is the greatest tailwind…we are innovating across the technology stack to help every organization while focusing on our operational excellence and execution discipline,” Nadella said.

Microsoft’s earnings reflect the company’s role as a leader in the U.S. and global economy, said Lee Sustar, principal analyst for infrastructure and operations at market research firm Forrester. “However, it’s difficult for Microsoft’s enterprise IT customers to understand what the profit numbers mean to them,” Sustar said, noting, for example, that Microsoft’s cloud reporting combines disparate businesses, while Azure’s results are typically reported in growth terms rather than hard numbers. .

However, the results highlight general trends, Sustar said. “Azure’s slower growth rate reflects fluctuations in IT spending, but Microsoft is well-positioned to capture those costs over time as more IT infrastructure moves to the public cloud.”