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Microsoft will help trim your Azure bill to encourage loyalty

This is not altruism: investors are nervous about slowing growth. Redmond’s response is short term pain for long term gain

Microsoft has told investors to brace for slower growth in its cloud business, as it works to optimize current customers' Azure rigs so they remain loyal customers.

The optimization plan was outlined today on Microsoft's fiscal Q1 2023 earnings call, covering the three months to September 30. The software giant reported revenue of $50.1 billion – an eleven percent year on year improvement that would have been 16 percent had exchange rates remained constant over the last 12 months.

Net income was $17.6 billion – a 14 percent decline that still saw the company beat market estimates. Execs cited $800 million of increased energy costs as one reason for that change.

But financial analysts did express concern about current and future revenue and margins from Microsoft's Azure cloud, which posted slower growth.

CEO Satya Nadella and CFO Amy Hood both pointed out that Azure sometimes lands monster clients that cause unpredictable spikes in revenue growth – so a quarter of slower improvement is not necessarily a sign of slowing enthusiasm for the company's cloud.

However, both execs conceded that Microsoft is willing to slow Azure billings growth if it improves customer loyalty. The pivot to loyalty suggests that customer attrition as well as unpredictable spikes could be contributing to slower than hoped-for growth.

"We will optimize for customer loyalty by helping customers to optimize spend," Nadella said, explaining that this course of action will deliver better long-term returns to shareholders.

"Job number one for our customer success teams is to proactively help cloud optimization," he said.

Nadella added that the expected global economic slowdown should help Azure, because customers can hedge against energy cost rises by outsourcing to the cloud, and can preserve capital by renting kit as needed instead of committing to on-prem costs.

Microsoft is already feeling the impact of consumer caution in a slight decrease of revenue in its "More personal computing" segment – Redmond-speak for Windows and other products not sold to business or delivered from clouds. Revenue from Windows licensees dipped 15 percent in the quarter and Microsoft forecast further falls as demand for the OS follows the global plunge in PC shipments. Xbox-related revenue also dipped.

Hood meanwhile admitted sales of Microsoft 365 could have been better, with buyers mostly plumping for the E5 license bundle because the cheaper E3 bundle as previously constituted was poor value and execution in the portfolio was poor. Hood vowed both issues will be addressed.

Hood and Nadella said Microsoft has taken on plenty of people in the last year and plans to keep most. They will ensure workers are focussed on the most strategic projects inside Microsoft: Cloud, security, Teams, Dynamics and LinkedIn .

Execs also mentioned on-prem and server software, with both segments dipping but the imminent launch of SQL Server 2022 hoped to give the category a boost.

Microsoft's share price dipped from $250 to $233 after the results announcement – a sign that investors are displeased by the company’s latest numbers and outlook, maybe its strategy too. ®

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