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Microsoft’s forecast suggests that the gloomy tech environment will continue

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Microsoft CEO Satya Nadella leaves the Elysee Palace after meeting with French President Emmanuel Macron in Paris on May 23, 2018.

Arelien Marisard | IP3 | Getty Images

Microsoft executives told analysts on Tuesday that they expected a continuation of the weak pace of business that emerged in December, hurting the software maker results of the second quarter of the fiscal year.

“In our commercial business, we expect the business trends we saw in late December to continue into the third quarter,” Amy Hood, Microsoft’s chief financial officer, said on a conference call.

In particular, the company saw lower-than-expected growth in subscriptions to Microsoft 365 productivity software, identity and security services and business-focused Windows products.

Growth in consumption of the company’s Azure cloud computing service has also slowed, she said.

The company sells products such as Xbox consoles and Surface PCs to consumers, but most of its revenue comes from commercial customers such as companies, schools and governments. This is where the impact will come into play. A metric called Microsoft Cloud — including Azure, Microsoft 365 commercial subscriptions, LinkedIn commercial services and Dynamics 365 enterprise software — now accounts for 51% of total sales.

Large organizations are optimizing their spending on cloud services, a key growth area for Microsoft, CEO Satya Nadella said. Such behavior was also played out in first fiscal quarterand in October, Amazon also talked about how it helps cloud customers optimize your costs.

Microsoft has made changes to the product to highlight places where customers can lower their cloud bills, Nadella said.

Hood said Azure’s growth will slow further. For the entire December quarter, revenues from Azure and other cloud services grew by 42% in constant currency. But in December, Hood said, growth was in the mid-range of 30% in constant currency, and she forecast a further slowdown of 4 to 5 percentage points in the current quarter ending in March.

According to Hood, the slowdown that began in December should also weigh on Q3 results for Windows commercial products and cloud services, a category that includes Windows enterprise licenses for businesses. Its forecast included flat revenue from Windows commercial products and cloud services, compared with a 3% decline in the fiscal second quarter.

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