Dive Brief:
- Cloud was a bright spot in Microsoft’s slowest-growth quarter in eight years. The tech giant reported 2% year-over-year growth for FY-2023 Q2, with revenue of $52.7 billion in the three-month period ending Dec. 31.
- Cloud revenue increased 22% year over year, to $27.1 billion, offsetting a 19% revenue decline in personal computing.
- “Organizations are exercising caution given the macroeconomic uncertainty,” CEO Satya Nadella said during the Tuesday earnings call. “Just as we saw customers accelerate their digital spend during the pandemic, we are now seeing them optimize that spend.”
Dive Insight:
The growth curve for cloud is slowing for Microsoft, as economic realities force companies to shift investment patterns.
In a natural cycling of business priorities, enterprises that underwent modernization are now focused on consolidation. That realignment accounts for a temporary decline in cloud revenue growth, according to Nadella.
“Every large customer is looking to optimize the workloads that they have at scale today and plow some of that money back that they save into new project stock,” Nadella said.
Inflation and fears of a recession have increased enterprise budget hawkishness, pushing CIOs to review vendor contracts, scrutinize software spending and optimize cloud investments.
Microsoft pledged to help customers control cloud costs last year, in part by trimming back its capital expenditures. In July, the company extended the life of cloud server components from four to six years to reduce expenditures, in the hopes of passing savings on to customers.
“This is an important time for Microsoft to work with our customers, helping them realize more value from their tech spend and building long-term loyalty and share position while internally aligning our own cost structure with our revenue growth,” Nadella said.
Microsoft’s server and cloud services revenue increased 20% in Q2, a growth decline of nine percentage points as compared to the same period last year. Azure and other cloud services revenue growth came in at 31%, a decline of 15 percentage points year over year.
The stall in revenue growth is expected to flatten rather than reverse in the coming months, Microsoft CFO Amy Hood said during the earnings call.
The first of the big tech companies to report earnings this quarter, Microsoft is the second-largest hyperscaler, with a 21% market share, according to Synergy Research Group. The big three cloud providers —AWS, Google Cloud and Microsoft Azure — control just over three-quarters of the U.S. market.
Global spending on public cloud infrastructure defied the economy last year, reaching $544 billion, a 21% year-over-year increase, according to a Synergy Research Group report published Monday. It is expected to top $590 billion this year, according to analyst firm Gartner, growing at roughly the same rate as Microsoft’s cloud business — 20%.
