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Extra $800m energy costs zap Microsoft earnings forecasts

Microsoft energy costs will grow by around $800m this financial year.

Image by Max Saeling via Unsplash.

Rising energy costs will sting Microsoft for $800 million this financial year according to the firm, as it saw slightly slower growth of its Azure cloud business in its Q1 results.

In its earnings call CFO Amy Hood noted Microsoft’s energy costs will escalate throughout the year, saying of the $800 million: “Some of that was in Q1, but the majority of it will be in Q2 through 4.

“I think if you want to think about it as somewhere, [$250 million-ish] a quarter. It’s not exact, but that would be a decent assumption for the remainder of the year.”

Revenue for the quarter was up 11% to $50.1 billion, with net profit down 14% at $17.6 billion.

“The strength of the US dollar had a significant impact on Microsoft’s earnings; in constant currency terms revenue was up 16%, and profit down only 8%.

The firm’s “Intelligent Cloud” segment – which includes Azure as well as Microsoft 365 – was its largest business unit, with revenues of $20.3 billion, up 20% year-on-year. The star of this continues to be Azure “and other cloud services”, with 35% growth (or 42% in constant currency terms) – about a point lower than expected.

See also: Microsoft layoffs cost it $113m in Q4: That’s just 5 hours’ earnings

Productivity and Business Process revenue was up 9% at $16.5 billion, with both Office Commercial and Office Consumer growth at 7%, with LinkedIn revenue up 17% and Dynamics revenue up 15%. In More Personal Computing, revenue fell slightly to reach $13.3 billion, as Windows OEM revenue dropped 15% – although Windows Commercial products and “cloud services” revenue grew 8%.

On the slowing growth for cloud, Microsoft CEO Satya Nadella said the firm was seeing customers “optimise” their cloud usage – something Microsoft was actively aiming to help with, at least according to him.

“Our job number one for large swaths of our sort of even customer-facing organizations is to proactively help them optimize. In fact, our incentives in our customer success teams are lined up with them helping customers, quote/unquote, do more with less,” said Nadella on the Microsoft earnings call.

He also said moving to the cloud can help customers mitigate rising energy costs: “The best way to hedge against taking energy cost and be, in fact, more energy efficient is to move to the cloud.

“We look at this and say, this is a period where cloud’s going to gain share, because we’re still in the early innings of adoption. And so, we just want to invest going into it with that mindset and build long-term customer loyalty,” he added, suggesting the firm may absorb the rising Microsoft energy costs.

Can own-device ad revenue offset Microsoft energy costs?

Nadella also noted active Windows devices grew 20% over the pandemic – which Microsoft sees as more than good news for its OS income. The CEO said Redmond sees advertising revenue from its “owned and operated” inventory as a significant opportunity.

“Whether it is Bing and Search, whether it’s the feed. And those are things that you see some of the growth. We are share takers in the browser. We are share takers in terms of the engagement of the feed,” said Nadella.

This is clearly a longer-term ambition, as ad revenue across search, news and LinkedIn fell during the quarter, contributing to the fall in revenue for its personal computing business. But expect to see Microsoft make the most of any space it can get in front of your eyeballs – including Windows itself.  

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