Microsoft Cloud grows, but less than expected

Microsoft has reported revenue for its first quarter of 2023 of $50.1bn, up 11% compared to the same quarter last year. However, net income was $17.6bn, a 14% decrease.

The company said it had experienced “strong overall demand” for its Microsoft Cloud offerings. Commercial bookings declined by 3%, however. It reported an increase of 22% for server products and cloud services revenue driven by Azure and other cloud services revenue growth of 35%.

CFO Amy Hood said Microsoft had seen strong renewal execution. “We continued to see growth in the number of large, long-term Azure and Microsoft 365 contracts across all deal sizes,” she said. “More than half of the $10m-plus Microsoft 365 bookings came from E5.”

Asked why Azure growth was below guidance, Hood said: “We see the number, which is that it is still a very large growth rate, with growth across all segments and with growth across all geographies.” She said the company focused on customer success during the quarter, “making sure we are helping them optimise their workloads”.

With the complicated macroeconomic environment, Hood said these optimisations delivered value, even as budgets grow, and budgeted spending continued to grow.

Commenting on the results, Satya Nadella, CEO of Microsoft, said: “Based on current trends continuing, we expect our broader commercial business to grow at around 20% in constant currency this fiscal year, as we manage through the cyclical trends affecting our consumer business.”

Looking at the Azure business, Nadella said: “Moving to the cloud is the best way for organisations to do more with less today. It helps them align their spend with demand and mitigate risk around increasing energy costs and supply chain constraints. We are also seeing more customers turn to us to build and innovate with infrastructure they already have.”

According to Nadella, the best way for businesses to align spending with uncertain demand is to move to the cloud. “The big winner in all of this will be public cloud, because public cloud helps businesses offset the risk of taking demand risk,” he said. Asked about the increased cost of energy, Nadella said: “The best way to hedge against taking energy cost and be, in fact, more energy efficient is to move to the cloud.

“This is a period where cloud is going to gain share, because we are still in the early innings of adoption. And so, we just want to invest going into it with that mindset and build long-term customer loyalty.”

The company’s results also show that GitHub, the business it acquired three years ago, now contributes $1bn in annual recurring revenue. Nadella said: “GitHub’s developer-first ethos has never been stronger. More than 90 million people now use the service to build software for any cloud and any platform.”

Looking at the Teams online conferencing platform, he said users interact with Teams 1,500 times a month on average. “In a typical day, the average commercial user spends more time in Teams chat than they do in email, and the number of users who use four or more features within Teams increased over 20% year over year,” he said. “Teams is becoming a ubiquitous platform for business processes.”