Microsoft reported results that fell short of analysts' expectations, showing its high-profile cloud business cannot quite make up for a slowing personal-computer market.
Shares fell 5 per cent in after hours trade to $52.92.
Two of Microsoft’s three major businesses showed lower operating profits, led by what Microsoft calls its intelligent cloud division, which includes its Azure cloud-services business as well as traditional server software. Despite revenue at Azure more than doubling, revenue in the division grew just 3 per cent.
"We would have liked to have seen 7 to 9 per cent growth," Dan Morgan, a portfolio manager at Synovus Trust who holds Microsoft shares, said of intelligent cloud revenue. "We're trying to validate this story that Microsoft is truly becoming a cloud company, and they're not going to be relying on the desktop computer."
Microsoft executives said that the shortfalls in the intelligent cloud business were due to pressure on products that were tangential to the main cloud push, such as server software, which mollified some investors.
"Microsoft's cloud business is gaining sales and momentum in the marketplace, so I am willing to give them the benefit of the doubt on this quarter's missed external expectations," said Matt McIlwain, a venture capitalist at Madrona Venture Group who watches Microsoft closely. "But, the combined top line and bottom line miss will raise the stakes for their final quarter of the 2016 fiscal year."
Revenue at the Redmond, Washington-based software giant fell to $20.53 billion from $21.73 billion.
The company’s net income in the third quarter ended March 31 fell to $3.76 billion, or 47 cents per share, from $4.99 billion, or 61 cents per share, a year earlier.
Tax rate
The company in part blamed a higher-than-expected tax rate for the lower net income.
Adjusted revenue of $22.08 billion was just shy of the $22.09 billion analysts had expected, according to Thomson Reuters I/B/E/S.
Excluding one-time items, Microsoft earned 62 cents per share. Analysts on average had expected a profit of 64 cents per share.
Operating profit at the productivity and business processes group, which includes its Office software, dropped 7 per cent. Revenue grew 1 per cent to $6.5 billion.
But operating profit at Microsoft’s biggest division, More Personal Computing, which includes its Windows operating system, the Surface computer and its Xbox gaming system, rose 57 per cent from the prior-year quarter to $1.65 billion. Improved profit margins were driven by lower expenses in Microsoft’s phone business, which the company scaled back drastically last year, and sales of Surface portable devices.
Revenue in the group rose 1 per cent to $9.46 billion in the quarter. Worldwide PC shipments fell 11.5 per cent in the same period, according to research firm IDC.
Revenue in Microsoft’s intelligent cloud business, which includes the Azure cloud infrastructure-and-services business as well as products such as noncloud-related server software, rose 3.3 per cent to $6.1 billion in the quarter.
Many investors gauge Microsoft’s cloud strength by looking at what it calls its commercial cloud, a separate measure that includes cloud businesses such as Azure and Office 365 software. The commercial cloud is on track for over $10 billion in revenue for the year starting in March, it said, up from the $9.4 billion figure it gave last time.
Chief executive Satya Nadella has focused on developing the company's cloud business with his "mobile first, cloud first" strategy, since taking over in early 2014.
