Microsoft warns of cloud computing slowdown

Microsoft on Tuesday warned of a sharp decline in its cloud computing business as big customers curb spending amid a slowing economy, sending its shares down 7 percent in aftermarket trading.

A cautious note in a call with Wall Street analysts dampened hopes that continued demand for cloud services would offset a decline in the PC market and help the world’s largest software company fend off broader pressures in the IT market.

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

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Chief Executive Satya Nadella blamed the cloud slowdown on customers’ efforts to “optimize” their spending to save money as the economic outlook darkened. Microsoft also said higher energy costs from running its massive cloud centers are eating into its profits and will add $800 million to its costs this year.

While revenue from software sales to PC makers will fall more than 30 percent this quarter, Microsoft forecast revenue of $52.35 billion to $53.36 billion, or $3.2 billion below Wall Street’s mid-point estimates. the range is less.

The analyst’s dour call came after Microsoft earlier reported that it had endured an economic contraction 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 above expectations.

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The numbers reflect a sharp decline in sales of Microsoft’s traditional PC software, cutting into its wider profit margins.

Software sales to PC makers fell 15 percent, and total revenue for Microsoft’s personal computer division was $14.3 billion, up 3 percent in constant currency. According to Gartner, PC shipments fell 19.5 percent in the third quarter, the largest decline since PC market tracking began in the mid-1990s.

Although Microsoft was able to make up for lost PC software sales with a 31% increase in revenue from its business cloud operations, poor cloud business profitability hit margins. Had it not been for a change in accounting policy that extended the useful life of its data center equipment and reduced depreciation costs, Microsoft said its gross margin would have fallen 3 percent 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 latest quarter after adjusting for currency movements. Revenue at the Productivity and Business Processes division, which includes Office, rose 15 percent to $16.5 billion.

Microsoft said the big jump in the dollar cut revenue by $2.3 billion. The latest results were driven by an increase in the price of the Office 365 suite of productivity tools, as well as the completion of the acquisition of Nuance, which had sales of approximately $350 million in the same period last year.

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