Microsoft’s forecast suggests that the dark technology environment will continue

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

Aurelien Morissard IP3 | Getty Images

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

“We expect the business activity that we saw at the end of December to continue into Q3,” said Amy Hood, Microsoft’s chief financial officer, on a conference call.

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

The company’s cloud computing service Azure has also seen a slowdown in consumption growth, she says.

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. This is where the effect can be seen. The so-called Microsoft Cloud measure — including Azure, Microsoft 365 business subscriptions, LinkedIn Business Services and Dynamics 365 enterprise software — now represents 51% of total sales.

Large organizations are increasing their spending on cloud services, a key growth area for Microsoft, CEO Satya Nadella said. That feature also played out in the fiscal first quarter, and in October, Amazon talked about how it was helping cloud customers optimize their spending.

Nadella said Microsoft has made product changes to highlight areas where customers are lowering their cloud bills.

Hood said Azure growth will slow further. In the full December quarter, revenue from Azure and other cloud services grew 42 percent in constant currency. But in December, Hood said growth was in the mid-30% range in constant currency, and predicted a 4-5 percentage point drop in the current quarter, which ends in March.

The slowdown that began in December should carry through to Q3 results for Windows business products and cloud services, a category that includes Windows volume licensing for businesses, Hood said. Her forecast included flat revenue for Windows business products and cloud services, compared with a 3% decline in the fiscal second quarter.

See: The recession has already sold off stocks, said Virtus’ Joe Terranova.

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