Microsoft's outlook points to gloom ahead

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Microsoft's outlook points to gloom ahead

A Microsoft logo is seen in Issy-les Moulineaux near Paris.

Analysts said that despite the lackluster quarterly outlook of Microsoft Corp, the tech sector's outlook points to more gloom ahead, as the tech bellwether warned customers that they were cautious about spending in a turbulent economy.

Microsoft, the second most valuable U.S. company, sounded a cautious note in its quarterly earnings report, as a steep fall in client spending has sparked a series of high-profile layoffs in the tech industry.

The words caution and cautious were used by the company's chief executive, Satya Nadella, and other Microsoft executives at least six times on the one hour call on Tuesday.

Microsoft is the biggest bellwether for enterprise and cloud spending in the world. Nadella's comments about the slowdown in the cloud is not surprising. Dan Ives, analyst at Wedbush said it confirmed that a darker macro is in the horizon.

Management teams are conservative given the uncertain environment, which is going to be a trend we see across the tech space, according to Ives.

Nadella said Microsoft would focus on AI technology, calling it the next major wave of computing.

The tech giant has made multi billion dollar investments in OpenAI, deepening ties with the startup behind the chatbot sensation ChatGPT and building on a bet it made on AI four years ago.

Analysts said that the slowdown in Microsoft's revenue growth was a warning for the tech sector, with more weakness in its PC division than the cloud business.

We learned that no one is immune to macro. The quarter was largely fine, but we started to see softness in December, and the outlook for this quarter was worse than expected, said Rishi Jaluria, analyst at RBC.

Microsoft forecast third-quarter revenue in its so-called intelligent cloud business was a bit less than analysts' estimates, with a growth rate of as much as 19%. It reported better than expected second-quarter revenue for the segment, which initially pushed shares higher on Tuesday evening.

The companies from Amazon.com Inc to Facebook-parent Meta Platforms are already preparing for tougher months ahead by slashing tens of thousands of jobs to keep their cash reserves high.

Analysts expect the cash to be used for other investments, which could include fresh buybacks, mergers and acquisitions, or new technology, such as artificial intelligence.

Microsoft's shares fell by about 3% in pre-market trading on Wednesday. Cloud companies like Google, Amazon.com, Salesforce, Cisco, and Workday Inc. all declined.