Rising cloud revenue helps soften Microsoft’s growth slowdown

Microsoft reported its slowest growth in five years for the first quarter of its fiscal 2023, due largely to a strong US dollar and an ongoing decline in personal computer sales, causing net income to fall by 14 per cent to US$17.56 billion from this time last year.

However, the vendor was still able to post an overall increase in revenue, up 11 per cent to $50.1 billion for the three months that ended September 30, driven by the ongoing strength of its cloud computing services, which exceeded $25 billion in quarterly revenue, up 24 per cent.

As a result of the announcement, Microsoft saw its share price fall by 5.65 per cent in morning trading on the Nasdaq exchange Wednesday.

Speaking to analysts after releasing its financial results, Microsoft CFO Amy Hood said that the company delivered a solid start to its fiscal year, and that the results were “in line with our expectations, even as we saw many of the macro trends from the end of the fourth quarter continued to weaken through Q1," according to a transcript from Seeking Alpha.

Hood also noted the foreign exchange rates had impacted company results, and that due to the stronger US dollar, conversion from other currencies decreased total company revenue by five percentage points.

Microsoft segment results

Microsoft saw its productivity and business processes segment, which includes Office productivity software, increase by nine per cent during the quarter to $16.5 billion.

Office Commercial products and cloud services revenue increased seven per cent, driven by Office 365 Commercial revenue growth of 11 per cent, while Office Consumer products and cloud services revenue also increased by seven per cent, with the number of Microsoft 365 Consumer subscribers growing to 61.3 million.

Elsewhere in this segment, LinkedIn revenue increased by 17 per cent while dynamics products and cloud services revenue increased by 15 per cent, largely driven by Dynamics 365 revenue growth of 24 per cent this quarter.

The company’s intelligent cloud segment also saw growth during the quarter, increasing by 20 per cent to $20.3 billion. The segment includes the Azure public cloud for application hosting, SQL Server, Windows Server and enterprise services.

Azure and other cloud services saw revenue grow by 35 per cent, driving the overall 22 per cent increase in Microsoft’s server products and cloud services revenue.

Speaking on the same analyst call, Microsoft’s CEO, Satya Nadella, said that moving to the cloud is the best way for organisations to do more at a time when budgets and resources are being squeezed.

“It helps them align their spend with demand and mitigate risk around increasing 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 decrease in revenue, totalling $13.3 billion.

Although Windows Commercial products and cloud services revenue increased eight per cent and Nadella told analysts that Microsoft is seeing nearly 20 per cent more monthly active Windows devices than pre-pandemic, Windows OEM revenue decreased by 15 per cent, driven by the decline in in PC and tablet shipments as highlighted by IDC last month.

PC demand expected to weaken

IDC’s report forecast the combined market for PCs and tablets will decline by 2.6 per cent in 2023, as a result of inflation, the weakening global economy, and the surge in buying over the past two years. Consumer demand has slowed, education demand has largely been fulfilled, and enterprise demand is getting pushed out due to worsening macroeconomic conditions, IDC said.

Microsoft’s Gaming revenue outlook is also facing challenges, with Xbox content and services revenue decreasing by three per cent during the quarter. This could potentially worsen over the coming year, with both the US Federal Trade Commission (FTC) and the UK’s Competition and Markets Authority (CMA) announcing they are investigating the acquisition for potential antitrust violations.

“In a world facing increasing headwinds, digital technology is the ultimate tailwind… we're innovating across the entire tech stack to help every organisation, while also focusing intensely on our operational excellence and execution discipline,” Nadella said.

Microsoft's earnings reflects the company's role as a bellwether for the US and world economy, said Lee Sustar, principal analyst for infrastructure and operations at market research firm Forrester.

"However, it is difficult for Microsoft enterprise-class IT customers to parse out just what the earnings figures mean for them," Sustar said, pointing out, for example, that Microsoft’s cloud reporting combines disparate businesses, and Azure results are usually reported in terms of growth, not hard numbers.

However, the results do highlight general trends, Sustar said. "The slowdown in Azure growth rates reflects hesitation in IT spending, but Microsoft is well positioned to capture that spending over time as more IT infrastructure shifts towards public cloud."