Microsoft’s forecast suggests that a gloomy technology environment will continue

Microsoft’s forecast suggests that a gloomy technology environment will continue

Microsoft CEO Satya Nadella leaves the Elysee Palace after a meeting with French President Emmanuel Macron in Paris on May 23, 2018.

Aurelien Morissard | IP3 | Getty Images

Microsoft On Tuesday, executives told analysts to expect a continuation of the weak business pace that emerged in December, which hurt the software maker’s second-quarter financial results.

“In our commercial business, we expect business trends that we saw in late December to continue into Q3,” Amy Hood, Microsoft’s chief financial officer, said on a conference call.

In particular, the company saw less growth than expected in Microsoft 365 productivity software subscriptions, identity and security services and business-oriented Windows products.

Growth in consumption of the company’s Azure cloud computing service also slowed, she said.

The company sells products such as Xbox consoles and Surface PCs to consumers, but most of its revenue comes from commercial customers such as companies, schools and governments. That’s where the impact will show. A metric called Microsoft Cloud — including Azure, commercial subscriptions to Microsoft 365, commercial LinkedIn services and Dynamics 365 enterprise software — now represents 51% of total sales.

Large organizations are optimizing their spending on cloud services, a key area of ​​growth for Microsoft, CEO Satya Nadella said. This behavior also played out in the fiscal first quarter, and in October Amazon also talked about how it had helped cloud customers optimize their costs.

Microsoft made product changes to highlight places where customers could lower their cloud bills, Nadella said.

Hood said Azure growth would slow more. In the full December quarter, revenue from Azure and other cloud services increased by 42% in constant currency. But in December, Hood said, growth was in the mid-30% range in constant currency, and she predicted a further decline of 4-5 percentage points in the current quarter, which ends in March.

The decline that started in December should also translate into third-quarter results for commercial Windows products and cloud services, a category that includes Windows volume licenses for businesses, Hood said. Her forecast included flat revenue for commercial Windows products and cloud services, compared with a 3% decline in the fiscal second quarter.

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