Microsoft: You don’t drop the cloud, you optimize

Microsoft reported modest growth for the quarter ended December 31, 2022, with its consumer-facing products reporting significant revenue declines.

Quarterly revenue of $52.7 billion was up 2 percent year-over-year and resulted in GAAP net income of $16.4 billion — down 12 points.

Bad numbers from Satya Nadella’s software slingers included a 39 percent drop in Windows-related revenue paid by PC makers, a 34 percent drop in device sales, a 12 percent drop in Xbox content and services revenue, and a 2 percent decline in Office consumer products and cloud services revenue (although the business in this segment would have seen 3 percent growth had exchange rates not changed). The cost of search and advertising revenue increased by ten percent.

Revenue from server products and cloud services grew 20 percent, while revenue from Azure and other cloud services increased 31 percent. Revenue from Office Commercial products and cloud services grew 7 percent, and Dynamics did very well, growing 13 percent.

But on the earnings call, executives warned of a slowdown in growth for Azure and related products — down from 35 percent to four or five percentage points.

CEO Nadella had a theory for this impending slowdown.

Core Azure is transformed

“Just as we’ve seen customers accelerate their digital spend during the pandemic, we’re now seeing them optimize that spend,” he told investors.

“Also, companies are exercising caution in the face of macroeconomic uncertainty,” he added, before noting that customers may be holding back because “the next great computing wave is being born as we transform the world’s most advanced AI models into a new computing platform.” .”

Financial analysts posed several questions on the call about what “optimizing” cloud usage means. Nadella said “they’re trying to support some savings on some workloads,” and once they’ve done that, they’ll start new cloud projects.

The CEO said Microsoft Teams has already shown increased usage post-pandemic and expressed excitement for the upcoming debut of Teams Premium, which will move some existing Teams features to a new and more expensive price tier and likely increase revenue.

Nadella emphasized, as he did in Microsoft’s previous earnings announcement, that securing customer loyalty is on the agenda. Or as he put it, “helping them get more value out of their technology spend and build long-term loyalty and stock position.”

He also spoke of “internally aligning our own cost structure with our revenue growth” — a nod to the recent layoff of 10,000 employees.

Part of the software giant’s cost comes from rebuilding Azure for AI.

Nadella said, “The core of Azure, or what is referred to as cloud computing, is fundamentally changing in its nature and how compute storage and networking come together.”

“It’s sort of under the radar, if you will. For the last three and a half years, four years, we’ve been working very, very hard building both the training supercomputers and now of course the inference infrastructure. Because as soon as you use AI in your applications, it goes from a pure training effort to inference.”

“Core Azure itself is being transformed,” he said.

Once Azure is ready to deliver the AI ​​customers want, the cloudy growth will continue as customers leverage the savings from their optimizations and use more Azure. Microsoft will be well-positioned to capitalize on grateful customers as they begin to adopt AI, Nadella hypothesizes.

Nadella and CFO Amy Hood both acknowledged that macroeconomic conditions are not brilliant and that Redmond’s consumer businesses have suffered.

“Windows OEMs and devices will see further declines as the PC market returns to pre-pandemic levels,” Hood told investors. “And LinkedIn and search will be impacted as spending in the advertising market remains somewhat subdued.”

But executives on the conference call were overall optimistic, suggesting Microsoft’s recent cost cuts will keep finances in good shape, and pointed out that Office365 is a profitable machine — the productivity and business processes segment generated $8.2 billion $17 billion in operating income at $17 billion in sales – and that economic conditions are sure to improve.

If not, well, Microsoft’s balance sheet for the quarter showed $99.5 billion — yes, billion — in cash, cash equivalents, and short-term investments. That’s a reasonably comfortable buffer for even the rainiest day — though for unspecified reasons, it’s down $5 billion in six months. ®