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Microsoft Cloud Business Keeps Profits Flowing In Challenging Times

John Wanguba by John Wanguba
January 27, 2023
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Microsoft Corp (MSFT.O) announced results on Tuesday that showed some strength in the face of a shaky economy, bolstered by a cloud business that reached Wall Street targets for the end of 2022, but it may fall short of expectations in the current quarter.

Microsoft cloud business

The relatively stable outlook helped soothe fears that the lucrative cloud segment for big tech firms could be affected severely as customers look to reduce spending, and cloud revenue in the fiscal second quarter posted on Tuesday offset some weakness in the PC unit.

“The small miss on Microsoft’s cloud earnings forecast is likely just a reflection of the new economic reality that businesses are facing and not a harbinger of something worse,” said Bob O’Donnell, chief analyst at TECHnalysis Research.

Microsoft’s shares jumped 4 percent initially after the results before reversing course to slide 1% to $239.58 in after-hours trade. The stock has shed 18 percent in the past 12 months.

Microsoft joined other big tech firms in resorting to layoffs to pull through harder times, announcing last week it was slashing over 10,000 jobs. It reported fiscal second-quarter earnings surpassing Wall Street’s estimate.

It predicted third-quarter revenue in its so-called intelligent cloud business would be $21.7 billion to $22 billion, just under the analyst average prediction of $22.14 billion, according to Refinitiv. In the second quarter, revenue from that segment exceeded expectations slightly at $21.5 billion.

The cloud business is under the spotlight again following the roaring success of chatbot ChatGPT, which provides answers to general questions in plain language using artificial intelligence. The bot is a creation of the startup OpenAI, in which Microsoft is investing greatly and which needs intense cloud computing services.

“There’s a variety of ways that we can bring that technology either in specific offerings or to improve existing offerings,” said Brett Iversen, Microsoft’s head of investor relations, referring to OpenAI. He said revenue from OpenAI-related businesses would appear in revenue for Microsoft’s cloud service Azure in the future.

During the earnings call, Chief Executive Satya Nadella said it was too soon to set apart AI contribution from the Azure cloud workloads.

Azure cloud product revenue in the second quarter jumped 31 percent, in agreement with estimates compiled by Visible Alpha. It has steadily captured market share from leader Amazon.com Inc’s (AMZN.O) Amazon Web Services (AWS).

Azure ended last year with a 30 percent share in the cloud computing market, a rise from 20 percent in 2018, according to estimates from BofA Global Research. AWS fell to 55 percent from 71 percent during the same period.

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Azure sales

Microsoft’s revenue jumped 2% to $52.7 billion in the quarter ended Dec. 31, in contrast to the average analyst estimate of $52.94 billion, according to Refinitiv IBES. Net income dropped 12% to $16.4 billion, but adjusted income of $2.32 per share beat Wall Street’s consensus estimate of $2.29, based on Refinitiv calculations.

Sales at Microsoft’s More Personal Computing segment, which includes Windows, search, and devices revenue, fell 19% to $14.2 billion as the PC market continued to contract. The company predicts that revenue to fall to $11.9 billion from $12.3 billion in the current fiscal third quarter.

Tags: Amazon Web Servicesartificial intelligenceAzurebusinessChatGPTcloud computinginvestmentMicrosoftMicrosoft's cloud serviceopenAIprofitstechnologyWall StreetWindows
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