Microsoft’s forecast suggests gloomy tech environment will continue

Microsoft executives on Tuesday told analysts to expect a continuation of the weak pace of business that emerged in December, which hurt the software maker’s fiscal second quarter results.

“In our commercial business we expect business trends that we saw at the end of December to continue into Q3,” Amy Hood, Microsoft’s chief financial officer, said on a conference call.

In particular, the company saw less growth than expected in Microsoft 365 productivity software subscriptions, identity and security services, and business-oriented Windows products.

Growth in consumption of the company’s cloud computing service Azure also slowed down, she said.

The company sells products such as Xbox consoles and Surface PCs to consumers, but most of its revenue comes from commercial clients such as companies, schools, and governments. That’s where the impact will show up. A metric dubbed Microsoft Cloud — including Azure, commercial subscriptions to Microsoft 365, commercial LinkedIn services and Dynamics 365 enterprise software — now represents 51% of total sales.

Large organizations are optimizing their spending on cloud services, a key area of growth for Microsoft, CEO Satya Nadella said. That behavior also played out in the fiscal first quarter, and in October, Amazon also talked about how it had been helping cloud customers optimize their costs.

Microsoft made product changes to highlight places where customers could lower their cloud bills, Nadella said.

Hood said said Azure growth would slow down more. In the full December quarter, revenue from Azure and other cloud services rose 42% in constant currency. But in December, Hood said, growth was in the mid-30% range in constant currency, and she forecast a further slowdown of 4-5 percentage points in the current quarter, which ends in March.

The slowdown that started in December should also carry through to Q3 results for Windows commercial products and cloud services, a category that includes Windows volume licenses for businesses, Hood said. Her forecast included flat revenue for Windows commercial products and cloud services, compared with a decline of 3% in the fiscal second quarter.

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