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Azure revenue growth slows, Microsoft shares fall

Cloud services business growing in double digits
  • Reuters (ARN)
  • 31 January, 2019 09:00
Satya Nadella (Microsoft)

Satya Nadella (Microsoft)

Microsoft has met Wall Street's targets for its quarterly results and forecast, though Azure cloud computing sales grew more slowly than a year earlier.

Shares of Microsoft, one of the most valuable U.S. technology companies, fell three per cent in extended trade even though earnings per share slightly beat analysts' estimates.

The stock had closed 3.3 per cent higher in a broad tech rally.

Azure, Microsoft's flagship cloud product, had revenue growth of 76 per cent in the fiscal second quarter ended 31 December, down from a 98 per cent surge a year earlier. Azure sales increased 76 per cent in the September quarter as well.

Long known for its Windows software, Microsoft has shifted its focus to the fledgling cloud market where it is battling Amazon Web Services for dominance.

The company is rapidly picking up business from the retail industry in particular, which is aiming to keep pace with the e-commerce business of Amazon. This month alone, Microsoft announced deals with Walgreens Boots Alliance and Kroger, on top of a five-year agreement with Walmart it unveiled last year.

"Our strong commercial cloud results reflect our deep and growing partnerships with leading companies in every industry including retail, financial services, and healthcare," Microsoft CEO Satya Nadella said in a statement.

But Wall Street has grown accustomed to blockbuster earnings beats as companies around the globe ditch their own data centres for the cloud.

"It wasn't a blowout quarter," said analyst Shannon Cross of Cross Research. "That's probably playing a bit into" the stock decline.

Microsoft forecast revenue of between US$29.4 billion and US$30.1 billion in the current quarter. Analysts were expecting US$29.9 billion, according to data from Refinitiv.

The vendor also said a stronger U.S. dollar would hit growth of its intelligent cloud business segment, which includes Azure and other products, by two percentage points.

Microsoft has long courted customers outside the United States and has a 17 per cent share of the global cloud market, research firm Canalys previously said. Amazon has 32 per cent.

Microsoft is spending more on the latest cloud technologies to narrow the gap. Research and development expenses rose to US$4.1 billion in the quarter from US$3.5 billion a year earlier.

"Clearly the company is spending aggressively to double down on its cloud bet, a dynamic that is a smart move but caps margin upside in the quarter," said Daniel Ives, an analyst at Wedbush Securities.

Microsoft's total revenue climbed 12.3 per cent to US$32.47 billion. Wall Street analysts on average had expected revenue of US$32.51 billion, according to data from Refinitiv.

Revenue from Microsoft's productivity software unit climbed 13 per cent to US$10.1 billion, powered by double-digit revenue growth for LinkedIn and Office 365.

Wall Street analysts on average had expected revenue of US$10.09 billion, according to data from Refinitiv.

Microsoft's personal computing division, home to Windows software and still its largest by revenue, showed revenue growth of seven per cent to US$13 billion, while analysts had expected US$13.07 billion.

The unit also includes Xbox gaming consoles, the Bing online search service and Surface laptops.

Microsoft reported a profit of US$8.42 billion. Excluding one-time items, it earned US$1.10 per share, edging past analysts' estimates of US$1.09 per share.

(Reporting by Vibhuti Sharma in Bengaluru and Jeffrey Dastin in San Francisco; Editing by Sai Sachin Ravikumar and Richard Chang)