Microsoft’s slowing cloud growth casts shadow over report

Microsoft Corp. posted quarterly sales and profit gains, but reported decelerating revenue for Azure cloud-computing services, raising concern among some investors that the pace of growth in that division has peaked. Shares slipped in late trading.

Revenue in the second quarter, which ended Dec. 31, climbed 20 per cent to US$51.7 billion, the Redmond, Wash.-based software maker said Tuesday in a statement. Still, Azure sales growth of 46 per cent fell short of the rosiest estimates of analysts and investors, who have come to expect gains of as much as 50 per cent or more per quarter.

Chief executive Satya Nadella has turned the company’s Azure business into a solid No. 2 behind Amazon. com Inc. in the market for cloud infrastructure services — computing power and storage delivered via the internet. While Azure sales have been rising steadily, Microsoft faces steep competition from Amazon for big contracts, the market leader, and Google, which ranks third but is pouring resources into the business as it works to catch up.

“We’ve kind of hit the highest peak of growth we’re going to see in a while,” said Brent Thill, an analyst at Jefferies LLC. “You have a theme of decelerating growth and harder comps are coming up.”

Second-quarter revenue was predicted to be US$50.9 billion on average, according to analysts polled by Bloomberg. Net income rose to US$18.8 billion, or US$2.48 a share, while analysts had predicted US$2.32.

Microsoft shares declined 2.7 per cent to US$288.49 at the close in New York. While the stock jumped 51 per cent in 2021, it has fallen 14 per cent so far this year amid a rout in large technology stocks.

“In this panicky market, the Street wanted a bigger cloud upside,” said Dan Ives, an analyst at Wedbush. In the fiscal first quarter, Azure revenue soared 50 per cent, preceded by a 51-per-cent increase in the period before that.

The software giant is one of the first of the largest technology companies to report earnings, so investors are closely watching the results as a bellwether for earnings releases from companies like Apple Inc., which will report on Thursday, and Google parent Alphabet Inc. next week.

“Microsoft is obviously going to be considered a leader,” Thill said. “Their comments about the world will set the stage for the rest of the tech.”

Azure and cloud demand in the quarter was actually better than Microsoft had expected, Microsoft chief financial officer Amy Hood said in an interview.

“The continuity of the growth in Azure is actually pretty pleasing to us,” she said. “Customers are turning to Azure and the Microsoft Cloud to really fundamentally run their businesses differently.”

Other tech stocks including Alphabet and Amazon, whose AWS cloud division is its most profitable, extended declines in late trading after Microsoft’s report.

Commercial cloud sales in the quarter rose 32 per cent to US$22.1 billion, Microsoft said. Gross margin, or the percentage of sales left after subtracting production costs, in that business narrowed slightly to 70 per cent, the company said.