Microsoft’s cloud business maintains profits in tough times

Jan 24 (Reuters) – Microsoft Corp (MSFT.O) released results on Tuesday that showed some strength in the face of a weak economy, underpinned by cloud activity that met Wall Street targets for the end of 2022, but that could miss expectations in the current quarter.

The relatively stable outlook helped ease fears that the lucrative cloud segment for big tech companies could be hit hard as customers seek to cut spending, and fiscal second-quarter cloud revenue reported on Tuesday offset some weakness of the PC unit.

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

Microsoft shares initially rose 4% after the results before reversing the trend to slide 1% to $239.58 in after-hours trading. The stock has fallen 18% over the past 12 months.

Microsoft has joined other big tech companies in turning to layoffs to weather tougher times, announcing last week that it was cutting more than 10,000 jobs. It posted fiscal second-quarter profits above Wall Street’s estimate.

It forecast third-quarter revenue from its so-called smart cloud business to be $21.7 billion to $22 billion, just below the average analyst forecast of $22.14 billion, according to Refinitiv. In the second quarter, revenue from this segment slightly exceeded expectations at $21.5 billion.

The cloud business is once again in the spotlight following the viral success of the chatbot ChatGPT, which answers general questions in plain language thanks to artificial intelligence. The bot is a creation of the startup OpenAI, in which Microsoft invests heavily and which requires intense cloud computing services.

“We can bring this technology in a number of ways, either in specific offerings or to enhance existing offerings,” said Brett Iversen, head of investor relations at Microsoft, referring to OpenAI. He said revenue from OpenAI-related businesses will appear in Microsoft’s Azure cloud service revenue in the future.

On the earnings call, chief executive Satya Nadella said it was too early to separate the AI ​​contribution from Azure cloud workloads.

Revenue from Azure cloud products in the second quarter increased by 31%, according to estimates compiled by Visible Alpha. It has steadily taken market share from Amazon Web Services (AWS) of leader Inc (AMZN.O).

Azure ended 2022 with a 30% cloud computing market share, up from 20% in 2018, according to BofA Global Research estimates. AWS went from 71% to 55% over the same period.

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Microsoft’s revenue rose 2% to $52.7 billion in the three months ended Dec. 31, versus an average analyst estimate of $52.94 billion, according to Refinitiv IBES. Net income fell 12% to $16.4 billion, but adjusted earnings of $2.32 per share beat Wall Street’s consensus estimate of $2.29, according to Refinitiv calculations.

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

Reporting by Yuvraj Malik in Bangalore and Jane Lanhee Lee in Oakland, California; Editing by Leslie Adler and Christopher Cushing

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