Microsoft’s cloud business keeps profits flowing through tough times

Jan 24 (Reuters) – Microsoft Corp ( MSFT.O ) showed some strength in earnings on Tuesday amid a weakening economy, supported by its cloud business hitting Wall Street’s target by the end of 2022 but likely missing expectations in the current quarter.

The relatively stable outlook helped ease concerns that Big Tech’s lucrative cloud-computing business could be hit hard as customers look to cut spending, with fiscal second-quarter cloud-computing revenue reported on Tuesday compensating for some weakness in the PC division.

“Microsoft’s small miss in cloud earnings forecasts may just be a reflection of new economic realities facing businesses, rather than a harbinger of worse,” said Bob O’Donnell, principal analyst at TECHnalysis Research.

Microsoft, along with other big tech companies, has turned to layoffs to tide it over, announcing last week that it would cut more than 10,000 jobs. It reported second-quarter earnings that topped Wall Street expectations.

The company forecast third-quarter revenue for its so-called intelligent cloud business of between $21.7 billion and $22 billion, slightly below analysts’ average forecast of $22.14 billion, according to Refinitiv data. The unit’s second-quarter revenue came in slightly above expectations at $21.5 billion.

Cloud businesses are back in the spotlight following the viral success of chatbot ChatGPT, which uses artificial intelligence to answer general questions in plain language. The robot is the product of startup OpenAI, in which Microsoft has invested heavily and requires a lot of cloud computing services.

Brett Iversen, Microsoft’s director of investor relations, said of OpenAI: “We can introduce this technology into specific products or improve existing products in many ways.” He said that future revenue from OpenAI-related businesses will be reflected in the revenue of Microsoft’s cloud service Azure middle.

On the earnings call, CEO Satya Nadella said it’s too early to separate AI contributions from Azure cloud workloads.

Azure cloud product revenue rose 31% in the second quarter, in line with estimates compiled by Visible Alpha. It has steadily taken market share from leader Inc’s (AMZN.O ) Amazon Web Services (AWS).

According to estimates from Bank of America Global Research, Azure’s share of the cloud computing market will rise from 20% in 2018 to 30% by the end of 2022. Over the same period, AWS dropped from 71% to 55%.

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For the three months ended Dec. 3, Microsoft’s revenue rose 2 percent to $52.7 billion. 31, compared with analysts’ average estimate of $52.94 billion, according to Refinitiv IBES data. Net income fell 12 percent to $16.4 billion, but adjusted earnings per share of $2.32 topped Wall Street’s consensus estimate of $2.29, according to Refinitiv calculations.

Sales in 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 shrink. The company expects revenue to fall to $11.9 billion to $12.3 billion in the third quarter of the current fiscal year.

Yuvraj Malik reported from Bengaluru and Jane Lanhee Lee from Oakland, California. Edited by Sriraj Kalluvila, Peter Henderson, Matthew Lewis and Leslie Adler

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