Microsoft warns of cloud computing slowdown

Microsoft warned on Tuesday of a marked slowdown in its cloud computing business as large customers pause their spending in the face of a slowing economy, sending its shares down 7 per cent in after-market trading.

The cautious comments, which came during a call with Wall Street analysts, dented hopes that continued solid demand for cloud services would offset a slump in the PC market and help the world’s largest software company withstand wider pressures in the IT market.

Microsoft warned that revenue growth from Azure, the cloud computing platform that has become one of the main engines of its business, would slow by 5 percentage points this quarter, leaving aside the effect of currency movements. At 42 per cent, growth in the quarter to the end of September was already one point below analysts’ expectations, and four points lower than the preceding three months.

Chief executive Satya Nadella blamed the cloud slowdown on efforts by customers to “optimise” their spending to save money as the economic outlook darkened. Microsoft also said higher energy costs from running its giant cloud data centres were eating into its profit margins, and would add $800mn to its costs this year.

With revenue from software sales to PC makers set to fall more than 30 per cent this quarter, Microsoft predicted revenue of between $52.35bn-$53.36bn, or $3.2bn below Wall Street forecasts at the midpoint of the range.

The downbeat analyst call came after Microsoft had earlier reported that it had largely withstood the economic slowdown in the three months to the end of September. Revenue grew 11 per cent to $50.1bn, slightly ahead of Wall Street expectations, while earnings per share of $2.35 were 4 cents higher than expected.

The figures reflected a sharp fall-off in sales of Microsoft’s traditional, highly profitable PC software, denting its wider profit margins.

Sales of software to PC makers fell 15 per cent, leaving overall revenue from Microsoft’s More Personal Computing division at $14.3bn, up 3 per cent in constant currencies. According to Gartner, PC shipments fell 19.5 per cent in the third quarter, the biggest decline since the research firm began tracking the PC market in the mid-1990s.

Though Microsoft was able to more than make up for the lost PC software sales with a 31 per cent increase in revenue from its commercial cloud operations, the lower profitability of the cloud business hit margins. Had it not been for a change in accounting policy that extended the useful life of its data centre equipment, reducing depreciation costs, Microsoft said its gross profit margin would have fallen by 3 percentage points in the quarter.

Revenue from the Intelligent Cloud division, which includes Azure, rose 26 per cent to $20.3bn in the latest quarter, after stripping out the effects of currency movements. Revenue at the Productivity and Business Processes division, which includes Office, increased 15 per cent, to $16.5bn.

The big jump in the dollar depressed revenue by $2.3bn, Microsoft said. The latest results were buoyed by a price increase earlier this year for its Office 365 suite of productivity tools, as well as the completion of its acquisition of Nuance, which had sales of nearly $350mn in the same period last year.