Microsoft Q4 falls short of expectations, but Azure set to drive double digit growth this year

Ukraine, China, COVID, its own LinkedIn advertisers - whoever’s to blame, it all leads to one reality which is that Microsoft just missed its numbers thank to “evolving macro-economic conditions and unforeseen items”.

The company still turned in a Q4  profit of $16.7 billion on revenue of $51.9 billion, up 12% year-on-year. But Intelligent Cloud revenue of $20.9 billion fell short of what Wall Street was looking for, although Azure and other cloud services revenue was up 40% year-over-year. And problems with PC production out of China cost the firm around $300 million in revenue, while $126 million in operating expenses was attributed to scaling back operations in Russia.

Against that backdrop, CEO Satya Nadella was in determinedly upbeat mode, arguing that Microsoft Cloud quarterly revenues surpassed $25 billion for the first time. There is ongoing interest in Azure, he said:

Organizations in every industry continue to choose our cloud to align their IT investments with demand. We are seeing larger and longer-term commitments and won a record number of $100 million-plus and $1 billion-plus deals this quarter. We have more data center regions than any other provider, and we will launch 10 regions over the next year.

Our new Microsoft Cloud for Sovereignty helps public sector customers meet urgent compliance, security and privacy requirements. With Azure Arc, we are meeting customers where they are enabling companies like GM, Greggs, UBS and Uniper to run applications across on-prem edge and multi-cloud environments. We are seeing more customers move their mission-critical workloads to Azure.

American Airlines, for example, chose our cloud to run its key operational workloads, including its data warehouse. And Telstra will move its internal IT workloads to Azure. And we are the platform of choice for SAP apps on the cloud. Leaders in every industry, including Kraft Heinz, Fujitsu and Unilever have migrated ERP workloads to Azure. 

The need to do more with less is driving Azure interest, he said:

What's happening in Azure is, in some sense, businesses trying to deal with the overall macro-economic situation and trying to make sure that they can do more with less. So for example, moving to the cloud is the best way to shape your spend with demand uncertainty, right? In fact, if anything, one of the things that we're seeing is an increased shift towards the cloud. And then, of course, optimizing your bill. We are incenting even our own field to ensure that the bills for our customers come down.

That, in fact, even shows up in some of the volatility in our Azure numbers because that's one of the big benefits of the public cloud. And that's why I think coming out of this macro-economic crisis, the public cloud will be even a bigger winner because it does act as that deflationary force. That's sort of what we are seeing in the Azure numbers. We will be exposed to consumer-driven businesses and SMBs. But at some level, our strength as a company is much stronger in the core commercial. So I think that we'll do fine there. The other one is also people building new applications at a completely new frontier.

The firm’s industry cloud offerings are also seeing strong adoption, he added:

For example, Microsoft Cloud for Healthcare, inclusive of Nuance, is becoming the platform of choice for companies across the health care value chain, looking to drive meaningful clinical and financial outcomes. Whether it's a provider modernizing care delivery, a health plan transforming the member experience or a retailer expanding into health services, having a technology partner that is truly dedicated to empowering their success is a significant differentiator for us. Intermountain Healthcare, for example, chose the Cloud for Healthcare as well as Nuance's DAX Ambient Intelligence solution as the pillar of its new digital strategy.

My take

Wall Street was commendably calm about numbers falling short of expectations, buoyed perhaps by Microsoft’s forecast that Azure will drive revenue growth by double digits in the coming fiscal year.  Alphabet has also turned in numbers that showed slower growth. All eyes will now be on The Company Formerly Known As Facebook, which opens up its financial kimono later today.