Microsoft backed by cloud business shows positive result in this weak economy.

On Tuesday, Microsoft Corp. posted results that showed some strength in this weak economy, supported by a cloud business that hit Wall Street targets for the end of 2022, but it may have missed expectations in the current quarter.

The relatively stable outlook helped lessen fears that the lucrative cloud segment for big tech companies could be hit hard as customers look to cut spending, and cloud revenue in the fiscal second quarter reported on Tuesday made up for some weakness in the PC unit.

“The small miss on Microsoft’s cloud earnings forecast is likely just a reflection of the new economic reality that businesses are facing and not a harbinger of something worse,” chief analyst at TECHnalysis Research, dBob O’Donnell, said.

After the results, initially, shares of Microsoft rose 4% before reversing course to slip 1% to $239.58 in after-hours trade. In the past 12 months, the stock has fallen 18%.

Announcing last week that it was cutting over 10,000 jobs, Microsoft joined other big tech companies in choosing layoffs as an option to ride out harder times. It posted that fiscal second-quarter earnings exceeded Wall Street’s estimate.

According to Refinitiv, it forecasted that third-quarter revenue in its cloud business would be $21.7 billion to $22 billion, which would be just below the analyst average forecast of $22.14 billion. In the second quarter, the revenue of the segment beat expectations slightly at $21.5 billion.

The success of chatbot ChatGPT has bought the cloud business under the spotlight again. ChatGPT answers general questions in plain language using AI. The bot is created by the start-up OpenAI, in which Microsoft is investing heavily and it requires intense cloud computing services.

“There’s a variety of ways that we can bring that technology either in specific offerings or to improve existing offerings,” said Brett Iversen, Microsoft’s head of investor relations, referring to OpenAI. He said revenue from OpenAI-related businesses would show up in revenue for Microsoft’s cloud service Azure in the future. Chief Executive Satya Nadella said, during the earnings call, that it was too early to separate out AI contributions from the Azure cloud workloads.

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

According to estimates from BofA Global Research, Azure ended 2022 with 30% share in the cloud computing market, up from 20% in 2018. During the same period, AWS dropped to 55% from 71%.

According to Refinitiv IBES, Microsoft’s revenue rose 2% to $52.7 billion in the three months ending Dec.31, compared with the average analyst estimate of $52.94 billion. Net income fell 12% to $16.4 billion but the adjusted income of $2.32 per share topped Wall Street’s consensus estimate of $2.29, according to Refinitiv calculations.

Sales at Microsoft’s More Personal Computing segment, which includes Windows, devices, and search revenue, declined 19% to $14.2 billion as the PC market continued to shrink. The company expects that revenue to drop from $11.9 billion to $12.3 billion in the current fiscal third quarter.

 

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