Microsoft warns Azure revenue growth to decelerate fuelling concern for demand

Azure grew 31 per cent for the period but the tech giant expects next quarter growth to decelerate as it posts its lowest quarterly sales growth in six years

Microsoft posted a flat top line in its latest quarterly results as customers shrink their technology spend to brace for adverse economic impacts.

Revenues in the second quarter climbed just two per cent to $52.7bn during the period ended December 31, 2022.

Net income was $16.4bn GAAP, a drop of 12 per cent compared to the same period of its last fiscal year.

Sales in Azure and other cloud services grew 31 per cent, aiding revenues in Microsoft's intelligent cloud segment to bring in $21.5bn.

However, with customers exercising caution in the current economic environment, the tech giant saw weaker results throughout December and only moderate consumption growth in Azure, its key growth driver.

"We exited Q2 with Azure growth in the mid-30s in constant currency. And from that, we expect Q3 growth to decelerate roughly four to five points in constant currency," Microsoft chief financial officer Amy Hood told listeners on an earnings call transcribed by Seeking Alpha.

"FX (foreign exchange) impact in Azure is about one point more than at the segment level."

The Azure downgrade comes as a Microsoft cloud outage hit tens of thousands of users worldwide, leaving them unable to access Microsoft Teams and Outlook today.

The CFO said Microsoft also expects revenues in its on-premises server business to decline low single digits as demand for hybrid solutions will be more than offset by unfavourable FX impact.

"And in enterprise services, revenue should decline low to mid-single digits, driven by Microsoft Consulting Services," Hood added.

More Microsoft layoffs ahead?

Prior to its Q2 results the powerhouse firm warned of plans to cut 11,000 people from its global workforce, representing about five per cent of its employee base.

Hood was pressed on further cost actions with specific regards to headcount during an audience Q&A.

"As we think about the Q4 guidance around low-single digit operating expense growth, we start to, as you know, sort of lap certain real acceleration points that we had last year.

"And we lapped the acquisitions both of Nuance and of Xandr. So, by the time that we get to the end of Q4, you will see very moderated headcount growth on a year over year basis in addition to some of the prioritisation decisions we have made.

"We take decisions like the one we had to make to get our cost structure more in line with revenue just incredibly seriously because we have lots of very talented people who were impacted by that.

"And so I do think that we feel confident in that exit rate. And as I have said, it will certainly imply that year over year growth as we lap some of the investments that we have made will be quite small."