Microsoft’s forecast suggests that the gloomy tech environment will continue

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

Aurelien Morissard | IP3 | Getty Images

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

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

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

Growth in consumption of the company’s Azure cloud computing service has 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 be. A metric called Microsoft Cloud — including Azure, business subscriptions to Microsoft 365, LinkedIn business services and Dynamics 365 enterprise software — now accounts for 51% of total sales.

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

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

Hood said Azure’s growth will slow even further. For the full December quarter, revenue from Azure and other cloud services grew 42% in constant currency. But in December, Hood said, growth was in the mid-30% range in constant currency, and she forecast a further slowdown of 4-5 percentage points in the current quarter, which ends in March.

The slowdown that began in December should also carry over 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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