Microsoft Revenue Up 2 Percent, but Profit Drops 12 Percent

Microsoft on Tuesday reported its slowest growth in six years and cautioned that a broader slump will continue as both consumers and businesses put the brakes on spending.

The technology giant said revenue increased 2 percent from a year earlier to $52.7 billion for the three months that ended in December. Profit fell 12 percent to $16.4 billion. 

Both were below Wall Street expectations, according to FactSet. Microsoft’s share price initially shot up more than 4 percent in after hours trading, thanks largely to its cloud-computing business, but it lost those gains after Amy Hood, Microsoft’s chief financial officer, said in a call with investors that new business slowed in December. The company also said that it expects growth to continue to slow in the current quarter, which ends March 31, as business customers continue to be cautious about buying new products.

Investors have been closely watching Microsoft’s cloud computing business and Azure, its flagship cloud product, because of their importance to the company’s future. In October, the company told investors to expect Azure’s growth to slow five percentage points in the quarter. But Azure sales growth slowed slightly less, to 31 percent, which was better than analysts feared, and the overall segment it calls Intelligent Cloud was up 18 percent, roughly in line with expectations.

“We saw strong execution in many regions around the world, however, performance in the U.S. was weaker than expected,” Ms. Hood said.

Wall Street has been trying to separate economic issues from how Microsoft is performing, said Brett Iversen, who heads investor relations for the company. “We are focused on what we can control, which is the execution side,” he said.

The past several months have been turbulent for Microsoft. In December, its $69 billion deal to acquire the video game maker Activision was challenged by regulators in the United States, and last week it began laying off about 10,000 workers.

On Monday, Microsoft announced a major new investment in OpenAI, the start-up behind ChatGPT and other generative artificial intelligence breakthroughs, and signaled plans to include A.I. in an array of Microsoft products.

Satya Nadella, Microsoft’s chief executive, emphasized the urgency with which the company is pursuing A.I. “We fundamentally believe that the next platform wave is going to be A.I.,” he said on a call with Wall Street analysts, while adding that Microsoft is moving aggressively to “catch the wave.”

He said the company is trying to build long-term loyalty from customers by helping them operate more efficiently. Because much of cloud computing is often billed based on how much computing power a customer uses, helping customers be more efficient can reduce Microsoft’s sales in the short term. But Mr. Nadella has argued that it also helps prove the value of cloud computing to let customers “do more with less.”

The biggest slowdown came from Microsoft’s personal computing business, where sales fell 19 percent and operating income fell 47 percent. The business boomed during the first part of the pandemic. But shipments of new PCs globally have been in a near free fall for months, and sales of the Windows operating system installed on new computers declined 39 percent. The company told investors it expected slow PC demand to persist and that it would look more like it did before the pandemic.

While announcing the layoffs last week, Microsoft said revamping costs would hit $1.2 billion, including severance, ending real estate leases and making “changes to our hardware portfolio,” which primarily consists of its line of Surface tablets and laptops. Sales of devices were down 39 percent last quarter, some of which it blamed on unspecified “execution challenges” in launching new products in its Surface lineup.

The company’s advertising revenue, which includes its Bing search engine and LinkedIn, performed slightly worse than it expected, Mr. Iversen said.

The results also showed continued costs from foreign currency fluctuations, with the strong dollar cutting sales growth by five percentage points.