Microsoft’s cloud business keeps profit flowing in tough times

January 25, 2023 0 Comments

Microsoft Corp posted results Tuesday that showed some strength in the face of a weakening economy, hit by a cloud business that met Wall Street’s target for the end of 2022, but it may have missed expectations in the current quarter.

The relatively stable outlook helped allay fears that the cloud segment, lucrative for big tech companies, could be hit hard as customers look to cut spending, and cloud revenue in the fiscal second quarter hit the PC unit on Tuesday. I reported some weakness.

“The small miss in Microsoft’s cloud earnings forecast is merely a reflection of the new economic reality facing businesses, not a harbinger of a worse situation,” said Bob O’Donnell, principal analyst at Technalysis Research.

Microsoft shares initially rose 4% before slipping 1% to $239.58 in after-hours trading. The stock has fallen 18% over the past 12 months.

Microsoft joined other big tech companies turning to layoffs to ride out tough times, announcing last week that it was cutting more than 10,000 jobs. It reported fiscal second-quarter earnings that exceeded Wall Street estimates.

According to Refinitiv, it will forecast third-quarter revenue in its so-called intelligent cloud business of $21.7 billion to $22 billion, well below the analyst average forecast of $22.14 billion. Revenue from that segment slightly missed expectations to $21.5 billion in the second quarter.

Cloud business is back in limelight after the viral success of chatbot ChatGPT, which uses artificial intelligence to answer common questions in simple language. The bot is a creation of startup OpenAI, in which Microsoft is investing heavily and which requires intensive cloud computing services.

Referring to OpenAI, Brett Iversen, Microsoft’s head of investor relations, said, “There are a number of ways we can bring that technology to either specific offerings or enhance existing offerings.” He added that revenue from OpenAI-related businesses will be reflected in future revenue from Microsoft’s cloud service Azure.

During the earnings call, Chief Executive Officer Satya Nadella said it was too early to separate AI contributions from Azure cloud workloads.

Azure cloud product revenue grew 31% in the second quarter, in line with estimates compiled by Visible Alpha. It has steadily taken away market share from leader Inc’s Amazon Web Services (AWS).

According to BofA Global Research estimates, Azure will end 2022 with a 30% share of the cloud computing market, up from 20% in 2018. AWS fell from 71% to 55% during the same period.

Microsoft’s revenue rose 2% to $52.7 billion in the three months ended December 31, according to Refinitiv IBES, while the average analyst estimate was $52.94 billion. Net income fell 12% to $16.4 billion, according to Refinitiv calculations, but adjusted earnings per share of $2.32 topped Wall Street’s consensus estimate of $2.29.

Sales in Microsoft’s more personal computing segment, which includes Windows, devices and search revenue, declined 19% to $14.2 billion as the PC market continued to shrink. The company expects revenue to decline to $11.9 billion to $12.3 billion in the third quarter of the current fiscal year.

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