Microsoft said Tuesday it expects growth in its cloud business to slow through 2023 as companies brace for economic headwinds.
The Windows maker reported a 29% rise in total cloud revenue to $21.5 billion in the second quarter of fiscal 2023, down from the 31% growth for the segment it reported in the first quarter of 2023. These figures do not include the impact of currency fluctuations. Microsoft said it expects its third-quarter cloud gross margin to decline by a percentage point, driven by Azure.
Microsoft Azure and other cloud services grew 38% year-over-year in constant currency, a slowdown of 4% quarter-over-quarter.
“As I noted earlier, we exited Q2 with Azure growth in the mid-30s in constant currency. From this, we expect growth in Q3 to be down about four to five percentage points in constant currency,” Microsoft said. Chief Financial Officer Amy Hood said on an earnings call.
Microsoft CEO Satya Nadella has warned that cloud computing growth is expected to slow further this year.
“As I meet with clients and partners, a few things have become increasingly clear. Just as we saw clients accelerate their digital spend during the pandemic, we are now seeing them optimize that spend,” Nathan said. Della said on the earnings call, adding that enterprises are being cautious about cloud spending.
Nadella further explained that enterprises optimize spending, saying that enterprises want to obtain the greatest return on investment and save the cost of investing in new workloads.
“…at some point, the optimization will end. In fact, the money they save on any optimization of any workload is money that they will invest in new workloads,” Nadella said, And added that Microsoft is ready to ensure that it gets a significant portion of its spending on new workloads.
Nadella asserted that the optimization phase of the business is temporary and is expected to last about a year.
According to the earnings call transcript, Hood said the company’s December financial results were weak and geographically, the U.S. was below expectations.
Microsoft also scaled back its outlook for other business units for the next quarter.
“Among these segments, we expect roughly four points of negative impact to productivity and business process revenue growth, three points to intelligent cloud and two points to more personal computing,” Hood said.
“In our consumer business, Windows OEM and devices will continue to decline as the PC market returns to pre-pandemic levels. LinkedIn and Search will be impacted as advertising market spend remains somewhat cautious,” added the CFO .
Microsoft is betting heavily on artificial intelligence
Nadella made it clear on the earnings call that Microsoft is betting on integrating AI into all of its products and services because the company believes AI will be in demand across the enterprise.
“The age of artificial intelligence is here, and Microsoft is powering it. We are witnessing non-linear improvements in the capabilities of the underlying models that we offer as a platform,” Nadella said, adding that the company is ready to capture new AI workloads.
Microsoft has been investing billions more in OpenAI, the company behind ChatGPT, and plans to launch new enterprise services based on the company’s generative AI products.
Other AI-based Microsoft products include GitHub Copilot and Azure ML services, which the company says have seen revenue growth of more than 100% over the past five quarters.
Microsoft reported total revenue of $52.7 billion for the quarter, up 7% from a year earlier, excluding the impact of currency fluctuations. The company’s net income rose just 1% year-over-year.
The company also took a $1.2 billion charge for severance, hardware-related impairment and lease consolidation costs during the quarter.
Across the divisions, the company’s revenues increased, with the Productivity and Business Processes segment totaling sales of $17 billion, up 13% in constant currency.
LinkedIn’s revenue, which is part of the Productivity segment, rose 14% in constant currency.
However, revenue in the business’s personal computing segment fell 16% in constant currency to $14.2 billion. Several segments of the personal computing segment, such as Xbox, Windows OEM, and Windows Commercial products, declined 8%, 39%, and 3%, respectively.
Devices revenue, which also forms part of the Personal Computing segment, declined 34% in constant currency.
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