Shares of Microsoft Corp. fell more than 3% in the after-hours trading session today after the Windows software maker and cloud computing giant offered softer-than-expected guidance for the current quarter.

Microsoft did at least beat expectations in the quarter just gone. The company reported net income of $20.1 billion for its fiscal 2023 fourth quarter, up 20% from a year earlier. Earnings before certain costs such as stock compensation came to $2.69 per share, while revenue rose 8%, to $56.19 billion. The results came in ahead of analysts’ expectations, with Wall Street looking for earnings of $2.55 per share on sales of $55.47 billion.

However, the company may struggle to repeat that success in the current quarter. Microsoft Chief Financial Officer Amy Hood said on a conference call that the company is looking at fiscal 2024 first-quarter revenue of between $53.8 billion and $54.8 billion, implying growth of about 8%. Unfortunately, the middle of that range came in below Wall Street’s consensus estimate of $54.94 billion.

Microsoft’s cautious guidance reflects how its growth has slowed considerably over the last year. The company has seen revenue grow by less than 10% for three consecutive quarters now, the first time that has happened since 2017.

It’s not for a lack of effort, though. One of the bright spots in the quarter was Microsoft’s Intelligent Cloud business, which delivered revenue of $23.99 billion, up 15% from a year ago and above Wall Street’s consensus estimate of $23.79 billion. The segment is made up of the Azure public cloud, plus Windows Server, SQL Server, GitHub, Nuance, Visual Studio and enterprise services.

Microsoft doesn’t break out its exact revenue for Azure, but it claimed that the business grew 26% during the quarter, beating the expectations of analysts who called for growth of 25%. Chief Executive Satya Nadella (pictured) told analysts on the call that “Microsoft Cloud” generated more than $110 billion in annual revenue, with Azure responsible for more than half of that amount.

Azure’s revenue growth fell slightly short of the past quarter’s growth at Google Cloud, the cloud infrastructure unit of its competitor Google LLC, which reported growth of 28% earlier today.

Although the cloud business is still growing, it’s doing so at a much slower rate than before. During the boom times of the COVID-19 pandemic, the Azure cloud would consistently grow at rates of 50% or more. Nowadays though, customers are being much more cautious.

In the conference call, Hood said many customers are looking to adjust their existing workloads to lower costs, prompted by fears over the economic situation. This has been going on for some time, and during the quarter, she said, “We saw a continuation of the optimization and new workload trends from the prior quarter.”

Elsewhere, Microsoft’s More Personal Computing segment, which includes sales from Windows, devices, gaming and search advertising, delivered $13.91 billion in revenue, down 4% from a year ago but just above the consensus estimate of $13.58 billion.

The damage there was the result of lower sales of Windows licenses to device makers. The market for personal computers is in decline, with market watcher Gartner Inc. recently reporting that sales of PCs declined about 17% during the quarter. Consequently, PC makers bought 12% fewer Windows licenses.

The situation is unlikely to improve any time soon, and is one of the reasons for Microsoft’s soft guidance. For the first quarter, Microsoft is forecasting the More Personal Computing segment to deliver $12.5 billion to $12.9 billion in revenue, lower than the $13.22 billion analyst estimate.

Microsoft’s other main segment is the Productivity and Business Processes unit that includes Office, LinkedIn and Dynamics 365, among other products. Revenue there rose 10%, to $18.29 billion, beating Wall Street’s $18.06 billion forecast.

All told, Microsoft delivered strong fourth-quarter results as it managed to keep growing the most important parts of its business, Constellation Research Inc. analyst Holger Mueller told SiliconANGLE.

“The key milestone is that services revenue is, for the first time, more than double that of product revenue, demonstrating how Microsoft is leaving its product legacy behind,” he said. “While product revenue was $8 billion less over the full year, services revenue more than compensated, growing by $22 billion in the same period. Overall, it is clear Microsoft wants to become a services company. It needs to produce a constant stream of services innovations to continue this transformation, and it’s well-placed to do that.”

With its pedestrian level of growth, Microsoft has been forced to reduce its expenses and that was reflected in its earnings statement today. For the first time in seven years, Microsoft’s research and development costs declined. That came after Nadella told employees in May that there would not be any pay rises this year. Then, in July, Microsoft announced a second round of job cuts. Some insiders say morale is low.

Microsoft does at least continue to invest in its big bet on generative artificial intelligence. During the quarter, it announced the availability of a new search experience for enterprise workers powered by OpenAI LP’s large language models. The launch of Bing Chat Enterprise came as the company announced pricing for its upcoming Copilot assistant for Microsoft 365 productivity applications. Although it’s still not clear when Copilot will launch, it will cost $30 per user per month.

AI is giving a boost to Microsoft’s cloud business too. The Azure OpenAI Service, which allows enterprises to access OpenAI’s LLMs, now has more than 11,000 customers, up from just 4,500 three months earlier, Microsoft said.

According to Hood, Microsoft’s efforts in AI are likely to have a greater impact on the company’s revenue during fiscal 2024. “Even with strong demand and a leadership position, growth from our AI services will be gradual as Azure AI scales and our Copilots reach general availability dates,” she said.

Photo: Microsoft/livestream