Column: Microsoft’s sales peak, warning to the IT industry | Reuters

NEW YORK (Reuters Breakingviews) – Microsoft’s revenue for the fourth quarter of last year rose 2% from a year earlier, the slowest growth in nearly five years. This means that alarm bells are ringing throughout the IT industry. Customers who overspended during the coronavirus pandemic are tightening their purse strings. Even MS’s “core product” cannot escape its influence. Dark clouds are looming over other IT companies whose products are more susceptible to discretionary spending.

MS’s staggering $1.8 trillion market capitalization largely speaks to how the company has grown rapidly and consistently since going public in 1986. During this period, the four-quarter moving average sales growth rate turned negative only twice. First, after the Great Recession of 2009, and then as CEO Satya Nadella turned the company into a subscription-based service, temporarily hurting revenue. It’s time to receive

Indeed, MS still hit $52.7 billion in revenue in the October-December quarter. The company’s productivity management software remains the standard product among office workers. In addition, companies are moving more data and apps to the company’s cloud service, Azure. In fact, Azure’s sales increased 31% in the October-December period, and this trend is sure to continue for the foreseeable future.

One difficulty is that businesses and consumers have invested heavily in high-tech in recent years to ensure a work-from-home environment. In other words, the original spending has been brought forward, leading to a slowdown in sales of current related products and services. For example, sales of personal computers (PCs) skyrocketed during the pandemic, but users are unlikely to replace them anytime soon, as they normally last four to five years. According to research firm Gartner, PC shipments fell by about 30% in the October-December quarter, the biggest drop ever. The revenue MS received from PC makers by installing the operating system “Windows” also decreased by 39%.

More generally, business owners are worried about a slowing or contracting real economy. Tech companies, in particular, are laying off significant numbers of employees to cut costs. If there are fewer clerical workers, the number of MS subscriptions will also decrease. And companies looking to cut costs will likely put off or scrap IT-related projects under consideration. That could hurt MS’s fastest-growing divisions such as Azure.

But MS’s sales plateau suggests that other tech companies that sell less-essential products to consumers and businesses than Microsoft face perhaps a bigger problem. If demand for core products such as Windows is felt to be cooling, so should advertising budgets, fancy new smartphones, and various communication devices. Companies such as Meta Platforms, Apple, and Cisco Systems are likely to face pressure on their sales one after another.

●Background news

* Microsoft reported $52.7 billion in revenue for the second quarter of last year (October-December) on Wednesday. The 2% year-on-year increase was the lowest quarterly increase since April-June 2017. Earnings were $16.4 billion, or $2.20 per share, down from $18.8 billion and $2.48 a year ago.

(The author is a columnist for Reuters Breakingviews. This column is based on the author’s personal opinion.)