Microsoft Posts Tepid Sales Growth as Cloud Business Slows

Microsoft Posts Tepid Sales Growth as Cloud Business Slows

Microsoft Corp. reported tepid fourth-quarter sales growth, held back by decelerating demand for cloud-computing services while the software maker waits for a revenue boost from new artificial intelligence-powered products.

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(Bloomberg) — Microsoft Corp. reported tepid fourth-quarter sales growth, held back by decelerating demand for cloud-computing services while the software maker waits for a revenue boost from new artificial intelligence-powered products.

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Profit in the period ended June 30 was $2.69 a share and sales rose 8% to $56.2 billion, the software maker said in a statement Tuesday. While overall results topped analysts’ projections, Azure cloud services revenue growth slowed to 27%, excluding currency fluctuations, from 31% in the previous quarter.

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Chief Executive Officer Satya Nadella has unveiled an array of new AI programs — based on models from partner OpenAI — for most of Microsoft’s major product lines, and demand is surging for internet-based services that let customers use the OpenAI technologies. Still, the company’s Office productivity suite including AI isn’t yet broadly available, and overall spending on Azure services and Office applications is easing after several years of rising corporate investments. At the same time, personal computer shipments dropped for the sixth quarter in a row, eroding sales of Windows software and Surface devices.

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“Clients who had been gung ho on cloud came back and said, ‘We’d better optimize what we bought,’” said Mark Moerdler, an analyst at Sanford C. Bernstein & Co. “You won’t see huge tailwinds from AI — it will be incremental.” 

The shares fell about 1% following the report, after climbing to $350.98 at the close in New York. The stock rose 18% in the three months ending in June, outpacing the 8.3% increase in the S&P 500 Index in that period. Last week, shares of Microsoft reached a record high, fueled by optimism for new AI strategies and products.

Amy Hood, Microsoft’s chief financial officer, said the recent period’s Azure growth rate was at the high end of what she had forecast, noting that she was “quite pleased with that number.” It’s typical for customers to try to get the most of cloud-based products they have already purchased, Hood said in an interview, but she expects less of an impact to Microsoft’s results in the coming quarters. 

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For the fiscal fourth quarter, analysts on average had estimated $2.56 a share in earnings and $55.5 billion in sales, according to a Bloomberg survey.

Annual sales growth moderated to 7% in 2023, the company said, after five straight years of increases above 10%. Microsoft fired 10,000 workers in the March quarter, including in key businesses like Azure and security software. The Redmond, Washington-based company made a smaller number of additional layoffs in July, in areas like sales and support.

The company is increasing spending to expand data centers and purchase chips needed to run complex AI systems. To make up for the hefty investments, Microsoft is rolling out ways to generate money from those products; earlier this month, the company set a price tag of $30 a month per user for its Office AI tools, called Microsoft 365 Copilot — on top of what most business customers already pay for the business productivity package, which includes Word, Excel, email and conferencing software.

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Microsoft has invested $13 billion in startup OpenAI, a partnership that vaulted the 48-year-old software maker to the forefront of a race to build new applications that let customers create new content from their existing data as well as information scraped from the web. Microsoft is overhauling most of its products — including Office, Windows, Azure and Bing search — around OpenAI’s latest language model, GPT-4 and adding chatbot technology similar to the startup’s viral hit ChatGPT.

“I’m very encouraged by the pace of adoption of our AI tools,” Hood said.

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Revenue in Microsoft’s Intelligent Cloud unit, made up of Azure and server software, was $24 billion, slightly above the $23.8 billion average analysts’ prediction.

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Microsoft’s sales from Windows operating system software sold pre-installed on computers fell 12% in the June quarter, a period when global PC shipments dropped 13%, according to market research firm IDC. Though that industry decline marked the sixth straight quarterly contraction in the market, total unit sales were better than forecast, IDC said. Microsoft’s Hood said some back-to-school PC sales occurred in the June quarter, helping to bolster results, but overall trends in the PC market are unchanged.

In the company’s More Personal Computing division, the unit that includes Windows software, Surface devices and Xbox businesses, sales slipped to $13.9 billion, compared with the $13.6 billion average estimate. In the Productivity segment, mostly Office sales, revenue rose to $18.3 billion. That’s slightly above the projected $18.1 billion.

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Microsoft’s Xbox content and services revenue rose 5%. The business has posted lukewarm growth for the last few quarters after a boom in game-playing during the pandemic.

The software maker’s $69 billion deal to acquire game publisher Activision Blizzard Inc., which has been working its way through regulatory challenges, was initially forecast to be completed by the end of June, but the companies last week extended their merger agreement until Oct. 18 to give Microsoft more time to work out the final hurdles. 

In the past two weeks, momentum has shifted in favor of the deal — the US Federal Trade Commission lost a bid to block it in court, and the UK’s Competition and Markets Authority said it will take the unprecedented step of re-engaging in talks with the companies to restructure the transaction.

“We’ll focus on working through the remaining regulatory bodies and working toward closing — that’s where our energy is,” Hood said.

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(Adds CFO’s comments starting in sixth paragraph.)

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