Microsoft Earnings Dented by Cloud Slowdown, Videogame Sales Drop

Net income for the three months through June was $16.7 billion.

Microsoft is starting to experience the effects of an ending pandemic-era boom. The Covid-19 outbreak fueled the adoption of cloud services and the sale of computers using its Windows operating system. In the most recent quarter, though, PC shipments suffered their steepest decline in years. The China disruptions and PC slowdown lowered Windows related revenue by $300 million, Microsoft said.

Chief Executive

Satya Nadella

said on an earnings call that the company wasn’t immune to the current economic turmoil, but added “IT spend is going to increase because every business is trying to fortify itself with digital tech to in some sense navigate this macro environment.”

The company gave an upbeat outlook, causing shares to rally after hours. Microsoft said sales and operating income on a currency-adjusted basis should increase by a double-digit percentage, financial chief

Amy Hood

said on the call. Microsoft shares jumped about 5% in late trading. The sales outlook for the current quarter, she said, was for $49.25 billion to $50.25 billion.

“Microsoft is not showing signs of a major recession yet,” said Bernstein Research analyst Mark Moerdler.

One of the areas seeing a slowing is the company’s videogame business that boomed during the pandemic. It had a 7% drop in sales year-over-year. Microsoft’s Xbox hardware sales retreated 11%, and content and services were 6% lower, in part, it said, because of lower user engagement. Ms. Hood said revenue would likely decline again this quarter.

Microsoft has bet big on the videogame business and is trying to secure approvals for its $75 billion deal for

Activision Blizzard Inc.

This month, Britain’s antitrust regulator opened a probe into whether the takeover might reduce competition. The company said it still expects the deal to close by June 30 next year.

The strength of the U.S. currency means Microsoft’s sales abroad are less lucrative, prompting last month’s profit warning. The company said the currency effect represented a $595 million hit to its top line.

International Business Machines Corp.

last week said its earnings were hit by the dollar’s strength. The WSJ Dollar Index, which tracks U.S. currency performance against other currencies, is up 10% since the beginning of the year.

Microsoft is among the lengthening list of tech companies pursuing belt tightening amid rising concerns about a recession. It recently imposed a hiring freeze on various parts of the company and laid off a small number of employees. Microsoft said that employee severance expenses were $113 million for the quarter.

Demand for cloud services that boomed during the pandemic is still increasing, though at a more modest pace. Microsoft, during the pandemic, reported several quarters in a row of 50% or more year-over-year sales growth for its Azure platform, the world’s No. 2 behind

Amazon.com Inc.’s

cloud.

The pace of growth has moderated in the most recent quarters. Microsoft said Azure and other cloud services saw sales rise 40% in the latest quarter, with analysts surveyed by FactSet expecting a 43% advance.

Microsoft’s advertising business had also seen strength in the pandemic, though the digital ad-market more broadly has been in turmoil recently. The company’s LinkedIn operations and other advertising revenue was down by more than $100 million.

Netflix Inc.

this month named Microsoft as a partner to build out its advertising-supported streaming business. Microsoft made $8.5 billion in search advertising sales in fiscal 2021, up more than 10% from the previous year.

Write to Aaron Tilley at [email protected]