Microsoft revenue up 2 percent but profit down 12 percent

Microsoft on Tuesday reported its slowest growth in six years and warned a broader slump will continue as both consumers and businesses rein in spending.

The tech giant said revenue for the three months ended December rose 2 percent year-on-year to $52.7 billion. profit fell 12 percent to $16.4 billion.

Both were below Wall Street expectations, according to FactSet. Microsoft’s stock price initially soared more than 4 percent in after-hours trading, thanks largely to its cloud computing business, but pared those gains after Microsoft’s chief financial officer, Amy Hood, said in a call to investors that new business slowed down in December . The company also said it expects growth to slow further in the current quarter ending March 31 as business customers remain cautious about purchasing new products.

Investors have been closely watching Microsoft’s cloud computing business and Azure, its flagship cloud product, for their importance to the company’s future. In October, the company told investors that Azure’s growth would decline five percentage points in the quarter. However, Azure’s revenue growth slowed a little less to 31 percent, better than analysts feared, and its overall segment, which it calls intelligent cloud, rose 18 percent, roughly in line with expectations.

“We saw strong execution in many regions of the world, but performance in the US was weaker than expected,” Ms. Hood said.

Wall Street has tried to separate economic problems from Microsoft’s performance, said Brett Iversen, who heads the company’s investor relations. “We’re focusing on what we can control, which is the execution side,” he said.

The past few months have been turbulent for Microsoft. In December, the $69 billion deal to acquire video game maker Activision was completed was challenged by regulators in the United States, and last week they began laying off about 10,000 workers.

On Monday, Microsoft announced a major new investment in OpenAI, the start-up behind ChatGPT and other generative artificial intelligence breakthroughs, and announced plans to bring AI to a number of Microsoft products.

Microsoft Chief Executive Satya Nadella emphasized the urgency with which the company is pursuing AI. “We fundamentally believe that the next wave of platforms will be AI,” he said when speaking to Wall Street analysts, adding that Microsoft is aggressively trying to “catch the wave.”

He said the company is trying to build long-term loyalty from customers by helping them work more efficiently. Because much of cloud computing is often billed based on the computing power used by a customer, helping customers improve efficiency can reduce Microsoft’s revenue in the short term. But Mr Nadella has argued that it is also helping to prove the value of cloud computing in allowing customers to “do more with less”.

The biggest slowdown came from Microsoft’s personal computing business, where revenue fell 19 percent and operating income fell 47 percent. Business boomed during the first phase of the pandemic. But shipments of new PCs worldwide were in one almost in free fall for months, and sales of the Windows operating system installed on new computers fell 39 percent. The company told investors it expects slow demand for PCs to continue and that it would look more like it did before the pandemic.

In announcing the layoffs last week, Microsoft said the cost of the transformation would be $1.2 billion, including severance payments, the termination of real estate leases and “changes to our hardware portfolio,” which consists primarily of its line of Surface tablets and laptops. Device sales fell 39 percent last quarter, some of which were attributed to unspecified “execution challenges” with new product launches in its Surface lineup.

The company’s advertising revenue, which includes search engine Bing and LinkedIn, performed slightly worse than expected, Mr Iversen said.

The results also showed ongoing costs from exchange rate fluctuations, with the strong dollar cutting sales growth by five percentage points.