Shares of Microsoft Corp. fell sharply in extended trading today after the company reported a worrying slowdown in cloud computing revenue growth and warned that sales in the next quarter will miss expectations by about $2 billion.

Microsoft only just beat expectations with its fiscal first-quarter results. It reported earnings before certain costs such as stock compensation of $2.35 per share, down from $2.71 per share in the same period a year ago, and just above Wall Street’s forecast of $2.31 per share.

Revenue for the period rose 11% from a year ago, to $50.1 billion, ahead of the consensus estimate of $49.66 billion. Altogether, Microsoft racked up a fiscal first quarter profit of $17.56 billion.

“In a world facing increasing headwinds, digital technology is the ultimate tailwind,” said Microsoft Chairman and Chief Executive Satya Nadella (pictured). “In this environment, we’re focused on helping our customers do more with less, while investing in secular growth areas and managing our cost structure in a disciplined way.”

Much of Microsoft’s growth over the past few years has been driven by its Azure cloud computing business, and there have been concerns lately that it might lose steam as the U.S. enters a potential recession. Those fears seem to be justified, for Microsoft revealed that Azure revenue grew by just 35% in the first quarter, slower than the 40% growth rate it reported three months earlier, and well off the 50% growth it saw one year earlier.

Azure’s revenue growth rate was the slowest Microsoft has reported in two years, since it began publishing such data. The company notably only reports percentage revenue growth for Azure, whereas rivals Amazon.com Inc. and Alphabet Inc. both provide a more detailed breakdown of their cloud revenues.

The bad news was compounded when Microsoft Chief Financial Officer Amy Hood said in a conference call that Azure could see a similar sequential revenue growth decline in the current quarter. She warned that percentage growth will fall by five points on a constant currency basis. Further, she said the company is looking into taking more cost-cutting measures, after laying off less than 1,000 employees earlier in the month.

“While we continue to help our customers do more with less, we will do the same internally,” she said. “And you should expect to see our operating-expense growth moderate materially through the year while we focus on growing productivity of the significant head-count investments we’ve made over the last year.”

Hood’s words of warning came after she issued a worrying forecast for the company’s fiscal second quarter. She told analysts that Microsoft sees revenue of between $52.35 billion and $53.35 billion, below the analyst consensus of $56.16 billion. Microsoft’s Intelligent Cloud business segment, which includes Azure, is expected to do between $21.25 billion and $21.55 billion in sales, just below Wall Street’s $21.82 billion forecast.

Investors balked at the news, and Microsoft’s stock fell more than 6% in after-hours trading, more than erasing a gain of just over 1% earlier in the day. The report sparked concerns about the wider cloud computing industry too, with Amazon’s stock also down more than 4%.

“The slowdown in Azure revenues is an obvious focal point,” said Charles King of Pund-IT Inc. “Given the common focus of markets, services and revenues that Microsoft’s cloud business shares with AWS and Google Cloud, it’s no surprise that their performance is also coming under the microscope.”

The reaction was more positive from Microsoft’s industry partners. Gordon McKenna, chief technology officer at digital transformation services provider Ensono LLC, said the company’s results are simply a reflection of the difficult financial decisions that every large technology firm has had to make in recent months. Rather than dwell on them, he drew attention to Microsoft’s ongoing investments in its cloud business.

“Following this year’s Ignite, Microsoft continues to show investment in building the best products and platforms possible for organizations to handle all of their needs, including hybrid work, security measures, cloud deployment, AI-based tools and more,” McKenna said. “As we navigate the tricky waters of the economy right now, I anticipate Microsoft will continue to grow and rely on their partners to deliver high-quality services that drive business outcomes for customers.”

It’s not only the stalling cloud growth that Microsoft has to contend with, though. In addition, the company is being hurt by a strengthening U.S. dollar and a decline in personal computer sales, which had spiked during the COVID-19 pandemic. The company reported PC revenue of $13.3 billion in the quarter, which was more or less flat compared to the same period one year earlier.

The Intelligent Cloud business did $20.3 billion in revenue, up from the $16.96 billion it generated a year before, but just below Wall Street’s estimate of $20.46 billion. As for Microsoft’s Productivity and Business Processes segment, which includes Office, Dynamics and LinkedIn, it delivered $16.5 billion in sales, up from $15.04 billion the year before.

Holger Mueller of Constellation Research Inc. told SiliconANGLE that he saw some positives from Microsoft’s quarter, noting that most of its businesses still performed.

“Only the Office portfolio grew in the single digits, with everything else showing double-digit growth amid a tough economic environment,” Mueller pointed out. However, he said the company “didn’t do so great in terms of cost control, which meant its net income dipped.”

King said that while analysts didn’t pay as much attention to the PC business as they did to Azure, it’s likely that the stagnation there is also driving investor’s negative sentiment around the company.

“As a result of continuing economic challenges leading into the all-important holiday shopping season, tech vendors with significant exposure in consumer products, like Microsoft, seem to be taking it on the chin more than enterprise-focused companies,” King added. “IBM’s recent strong earnings report is a good example of this. We’ll likely have to wait until 2023 to see whether analysts’ current concerns about Microsoft and its competitors are justified.”

Photo: Microsoft