Microsoft warns of cloud computing slowdown

Microsoft warned on Tuesday of a marked slowdown in its cloud computing business as big customers pause their spending in the face of a slowing economy, sending its shares down 7 percent in after-market trading.

The cautious comments, which came during a call with Wall Street analysts, dented hopes that continued solid demand for cloud services would offset a decline in the PC market and help the world’s largest software company withstand broad pressures in the IT market.

Microsoft warned that revenue growth from Azure, the cloud computing platform that has become one of the main engines of its business, would slow by 5 percentage points this quarter, leaving aside the effect of currency movements. At 42 percent, growth in the quarter to the end of September was already one point below analysts’ expectations, and four points lower than the previous three months.

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Chief executive Satya Nadella blames the cloud’s slowdown on efforts by customers to “optimize” their spending to save money as the economic outlook darkens. Microsoft also said higher energy costs from running its giant cloud data centers are eating into its profit margins, and will add $800 million to its costs this year.

With revenue from software sales to PC makers set to fall more than 30 percent this quarter, Microsoft predicted revenue of between $52.35bn – $53.36bn, or $3.2bn below Wall Street forecasts in the middle of the range.

The downgraded analyst call came after Microsoft previously announced that it had largely weathered the economic slowdown in the three months to the end of September. Revenue rose 11 percent to $50.1 billion, slightly ahead of Wall Street expectations, while earnings per share of $2.35 were 4 cents higher than expected.

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The figures reflected a sharp decline in sales of Microsoft’s traditional, highly profitable PC software, densifying its wide profit margins.

Sales of software to PC manufacturers fell 15 per cent, leaving overall revenue from Microsoft’s more personal computing division at $14.3bn, up 3 per cent in constant currencies. According to Gartner, PC shipments fell 19.5 percent in the third quarter, the biggest decline since the research firm began tracking the PC market in the mid-1990s.

Although Microsoft was able to more than make up for the lost PC software sales with a 31 percent increase in revenue from its business cloud operations, the lower profitability of the cloud business was margins. Had it not been for a change in accounting policy that extended the useful life of its data center equipment, reducing depreciation costs, Microsoft said its gross profit margin would have fallen by 3 percentage points in the quarter.

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Revenue from the Intelligent Cloud division, which includes Azure, rose 26 percent to $20.3 billion in the last quarter, after stripping out the effects of currency movements. Revenue at the productivity and business processes division, which includes Office, increased by 15 percent to $16.5 billion.

Microsoft said the big jump in the dollar hit revenue by $2.3 billion. The latest results were supported by a price increase earlier this year for its Office 365 suite of productivity tools, as well as the completion of its acquisition of Nuance, which had sales of nearly $350 million in the same period last year.

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