Microsoft’s revenue sniffles are tech’s flu

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A Microsoft logo is seen on an office building in New York City, U.S. on July 28, 2015.

NEW YORK, Jan 24 (Reuters Breakingviews) - Microsoft’s (MSFT.O) revenue growth rarely falters. So its 2% increase in the latest quarter, the slowest in over five years, is alarming. Customers who overinvested during the pandemic are now retrenching, even on Microsoft’s staples. It’s a poor omen for firms built on more discretionary offerings.

The astonishing $1.8 trillion valuation Microsoft sports has a lot to do with how fast, and consistently, it has grown since going public in 1986. Its rolling four-quarter growth has only gone negative twice: once after the Great Recession in 2009 and later when Chief Executive Satya Nadella switched the firm toward subscriptions, which temporarily hit revenue.

Sure, the top line still reached $52.7 billion in the quarter. Microsoft’s productivity software remains standard among office workers. Moreover, companies continue to move more data and applications to Microsoft’s cloud. Its Azure platform grew 31%, a trend that ought to be sustainable for a while yet.

One glitch is that companies, and consumers, invested a lot in technology in recent years in order to work from home. This pulled forward some spending, lowering current growth. Sales of personal computers spiked during the pandemic, but users are unlikely to be buying replacements soon since the typical device lasts several years. Fourth-quarter shipments fell nearly 30%according to market researcher Gartner, the largest decline it has ever recorded. Microsoft’s revenue from computer manufacturers for installing the Windows operating system fell 39%.

More broadly, employers are worried about a slowing, or shrinking, economy. Tech firms in particular are firing significant chunks of their workforce to rein in costs. Fewer office workers mean fewer Microsoft subscriptions. And companies looking to cut costs will delay, or kill, IT projects, which will hit even Microsoft’s fastest-growing units. Azure’s growth was 15 percentage points higher a year ago.

Microsoft’s revenue sniffles, however, probably signal bigger problems for tech firms that sell less essential goods to consumers and firms. If staples like Windows are feeling the chill, advertising budgets, shiny new phones, and telecom gear will be too. Companies like Meta Platforms (META.O), Apple (AAPL.O) and Cisco Systems (CSCO.O) may be in line for a nasty bout of top-line flu.

Follow @rob_cyran on Twitter

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

Microsoft said on Jan. 24 that revenue for the quarter ending Dec. 31 was $52.7 billion. The 2% increase from the same period last year is the slowest quarterly growth for the software giant since June 2017.

Microsoft earned $16.4 billion, or $2.20 per share during the quarter, compared to $18.8 billion, or $2.48 per share in the same period a year ago.

Editing by John Foley and Sharon Lam

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