Microsoft Azure revenue continues to climb, despite slowdown

Microsoft's Azure continues to drive growth for the company, despite slowdowns in other areas as businesses look to cloud services for more of their technology needs.

The company reported a 40% rise in revenue for Azure, but only a 12% gain in overall revenues in its fiscal fourth quarter -- the company's slowest growth since 2020.

"Forty percent growth for Azure is pretty good in this environment," said Rob Strechay, a senior analyst at Enterprise Strategy Group. "Microsoft is running into the same problems Amazon did. It's hard to have huge numbers when the number you are multiplying against gets bigger every quarter."

Microsoft reported revenue of $51 billion with a net income of $16.7 billion, up just 2% compared with the same quarter last year. But like many enterprise software companies during the past six months, the company continues to deal with industry and geopolitical issues.

In an earnings call with financial analysts Tuesday, the company cited several reasons for the slowdown, including a decline in PC sales in June, longer than expected production shutdowns in China because of COVID, significantly scaling down its operations in Russia over the war in Ukraine, unfavorable foreign exchange rates, and costs associated with severance packages when the company laid off about 1% of its workforce earlier last quarter.

Though the company missed top- and bottom-line projections for the first time in six years, Microsoft offered a relatively upbeat forecast as it enters a new fiscal year. The company's forecast for its first fiscal quarter calls for revenue to fall between $49.25 billion and $50.25 billion, which would represent a 10% growth in revenue.

The continued growth of Azure was primarily responsible for fueling a 15% increase in Office 365 commercial products and a 9% in increase in Office consumer products. The company said its 365 consumer subscriber base grew to 59.7 million over the course of the quarter.

Satya Nadella

"We're seeing more customers move their mission-critical workloads to Azure," said Satya Nadella, Microsoft's CEO. "American Airlines, for example, chose our cloud to run their key operational workloads, including its data warehouse. Telstra will also move its internal IT workloads to Azure this quarter."

Another factor driving Azure growth is the record number of larger and longer-term contracts signed during the past quarter, according to Amy Hood, Microsoft's CFO and executive vice president.

"Even against a strong prior-year comparable, commercial booking increased 25%, which was ahead of our expectations," Hood said in the earnings call. "Our record commitment quarter was driven by increases in the number of $100 million-plus Azure and $10 million-dollar-plus Microsoft 365 contracts."

The company's Intelligent Cloud revenue increased 20% to $20.9 million, while overall server and cloud services revenues grew 26%, Hood said. The Intelligent Cloud part of the business includes Azure, SQL Server, Windows Server, Visual Studio, Nuance and GitHub. The company's on-premises server business declined 2%, she added.

Given the continued momentum of Azure and its Intelligent Cloud, Microsoft is expected to double down on its push to deliver platform-as-a-service offerings.

They are looking at services as a major growth opportunity going forward.

"They are looking at services as a major growth opportunity going forward," ESG's Strechay said. During the past few months, particularly at its Inspire conference earlier this month, Microsoft sharpened its focus on its partnerships for both co-developing and bundling cloud-based products and services.

"We are finding that large hyperscalers are effectively becoming distributors," Strechay said. "They are now including other people's software and taking a more measured approach to rolling out these services, which is really helping them out. Whereas, Amazon is still in the early days of reinventing their go-to-market channel."

In other segments of the business, revenue from LinkedIn was up 26%, and Dynamics products and cloud services revenues rose 19%, with Dynamics 365 business applications scaling up 31%. Server offerings and cloud services rose 22%, and the company's Surface line of mobile devices went up 10%.

For the full fiscal year, Microsoft revenues came in at $198.3 billion, up 18% compared with last year, with net income increasing 19% to $72.7 billion.

As Editor At Large with TechTarget's News Group, Ed Scannell is responsible for writing and reporting breaking news, news analysis and features focused on technology issues and trends affecting corporate IT professionals.

Enterprise Strategy Group is a division of Techtarget.