Microsoft isn’t in dire straits by any stretch of the imagination. The company reported a 2% year on year increase in revenue to $52.7 billion and net income which, while it fell 12% year on year, still came in at a whopping $16.4 billion. However, cloud revenue growth once again slowed, raising questions about just how long the spending downturn will last. According to CEO Satya Nadella, the answer is perhaps a while longer but certainly not forever.
To be clear, cloud growth was still robust, jumping 22% year on year to $27.1 billion. Sales in its Intelligent Cloud segment rose 18% to $21.5 billion and Azure and other cloud services revenue increased 31%, though Microsoft did not provide a breakout figure.
However, the overall cloud growth rate was down from 32% in FQ2 2022 and 34% in FQ2 2021.And during an earnings call on Tuesday, Microsoft CFO Amy Hood warned it expects the Azure growth rate in FQ3 to “decelerate roughly four to five points in constant currency.” Additionally, she predicted the on-premises server business will post a low single digit revenue decline in the current quarter.
As in FQ1 2023, CEO Satya Nadella attributed the slowdown in FQ2 to efforts among enterprises to optimize their cloud workloads. “We accelerated workloads during the pandemic over a period of two years. So, we are optimizing,” he explained. But he tipped spending to ramp back up as that cycle winds down and companies begin to pour those savings into new workloads.
In terms of when the latter might actually start to happen, Nadella said “I don't think we're going to take two years to optimize, but we're going to take this year to optimize. And then as we optimize the new projects start and the new project starts don't start instantly at their peak usage. They start and then they scale. And so, those are the two cycles that will happen where there will be a time lag.”
Nadella also predicted the next generation of workloads will look very different from those that were spun up during the pandemic, thanks in part to greater integration of artificial intelligence capabilities. Several media outlets reported earlier in the week that Microsoft is investing $10 billion in OpenAI to boost its features in this space.
“I don't think any application start that happens next is going to look like the application starts of 2019 or 2020. They're all going to have considerations around how is my AI inference performance, cost model is going to look like. And that's where we are well positioned again,” he concluded.