Microsoft's stellar cloud performance bolsters growth amid revenue slump

Microsoft has announced record cloud revenue in Q1 2023, even as revenue slowed and net income decreased across the same period.

Recording $50.1 billion in revenue during the quarter, it represents Microsoft's slowest growth in five years, just 11% up year on year (YoY). Net income was $17.6 billion, a 14% decrease YoY, above the industry expectation but still adversely impacting shares.

Microsoft pinned the slowdown on reduced consumer spending, as well as unexpected costs driven by fluctuating exchange rates and increases in energy costs.

However, the company’s cloud offerings continued to deliver healthy returns and demonstrate strong growth. Revenue in Intelligent Cloud across the quarter was $20.3 billion, up 20%, with cloud services and server products continuing to drive profit. Microsoft Azure, the current cloud market leader, saw a 35% revenue growth.

“This quarter Microsoft Cloud revenue was $25.7 billion, up 24% (up 31% in constant currency) year-over-year. We continue to see healthy demand across our commercial businesses including another quarter of solid bookings as we deliver compelling value for customers,” said Amy Hood, executive vice president and chief financial officer at Microsoft.

In Microsoft’s earnings call, Hood also pointed out the value of renewal in cloud services. Azure and Office 365 continued to draw long-term contracts from businesses of all sizes, and the enterprise-exclusive E5 licence for 365 remains particularly popular.

Additionally, Office 365 commercial revenue grew 11%, while Microsoft-owned LinkedIn reported a 17% revenue increase. Overall, Microsoft’s productivity and business processes department saw overall increases, but still reflected the slowing growth and economic downturns represented in the rest of the report.

Sales were down in Microsoft’s personal computing departments with $13.3 billion in revenue, down slightly on the same period from the previous fiscal year. Within this category, Windows OEM revenue decreased 15%, indicative of a slowdown in PC purchases.

“Microsoft’s revenue continues to grow thanks to its Azure cloud offering; however, the company’s rate of growth has slowed, which is reflected by the recent news that it let go 1,000 employees,” stated Dan Davies, CTO at Maintel.

“Cloud will continue to drive Microsoft’s revenue, as the growth of this industry is showing no signs of slowing down," he added. "The technology now permeates every part of our lives.

"With remote work now a fixture for many of us, tools like Teams have become staples, while in our personal lives even the activities we enjoy during our spare time depend on cloud technology, with online gaming and VR more popular than ever.”

What’s led to the slow growth?

Microsoft provided a number of explanations for its lower revenue. In addition to the growing economic uncertainty which is driving consumers and businesses to cut back on spending, Microsoft’s international trade has been impacted by the comparative strength of the dollar across the period, which made international sales more expensive.

In its earnings call, Hood said that financial exchanges will account for an approximate 5% decrease in total revenue growth going forward. Multinationals have indeed faced greater strain on their international trades as a result of the economic turbulence we now face, and Microsoft has faced the double-pronged effects of reduced consumer confidence even as the costs of shifting hardware worldwide increased.

The company also highlighted the increasing costs of advertising, and in its earnings call Hood pointed to the $800 million increase in energy costs across the period as having contributed to the lower than hoped for growth.

Such high energy prices are to be expected for Microsoft, which runs a colossal number of data centres, sites, and offices worldwide. Gartner predicts data centres could cost 40% or more than usual to run in the coming months, and operational costs are unlikely to decrease until the worldwide energy market stabilises.

Like other big tech firms such as Twilio, Microsoft has slowed down hiring in the past few months, reportedly advising staff to slow recruitment. In the past month, the company also reportedly made 1,000 employees redundant, looking to reduce numbers across a range of departments.

Despite this, in its earnings call the company reported that headcount grew 22% year on year, although it is likely that the true trajectory of hiring at Microsoft will become clearer over the next few quarterly reports.