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Microsoft is starting to experience symptoms of COVID-19 in its cloud business

July 23, 2020, 12:22 AM UTC

Microsoft is beginning to show some signs that the economic malaise related to the COVID-19 pandemic is affecting its business.

The technology giant said Wednesday that its overall revenue jumped 13% year-over-year to $38 billion in its fiscal fourth quarter, which for most companies operating amid the coronavirus pandemic would be something to cheer. But Microsoft shares nonetheless declined 2.3% in after-hours trading, to $206.93, likely due to slowing growth in the company’s all-important Azure cloud-computing unit.

Azure sales were up 47% in the fourth quarter, which again sounds like a breakneck pace—but which marked the first time ever that the unit didn’t deliver year-over-year revenue growth of 50% or higher. Microsoft does not disclose specific sales numbers for many of its units, including Azure, only how much they’ve grown on a percentage basis.

Investors have grown accustomed to breathtaking growth in the cloud computing service that serves as the core of everything Microsoft sells to customers. But the coronavirus pandemic appears to be causing companies to slow their IT spending, as research firm Gartner reported earlier in July, which seems to have caused a bit of a slowdown for Azure.

Other aspects of Microsoft’s business have hit roadblocks as of late as well. Earlier this week, the company’s LinkedIn unit said it would lay off 960 employees, particularly affecting the unit that’s responsible for hiring and recruiting services. As LinkedIn CEO Ryan Roslansky said in a public note, “fewer companies, including ours, need to hire at the same volume they did previously.”

And Microsoft’s Bing search advertising business plunged 18%, an indication that companies are pausing their online ad spending.

Despite these hiccups, however, Microsoft is experiencing massive growth in one area of its business where it’s investing heavily—gaming. The advent of the coronavirus and ensuing shelter-in-place orders have meant that people have a lot more free time at home than they once did, and they are turning to video games to help fill the void.

Sales in Microsoft’s Xbox gaming unit (a combination of Xbox console sales, video games, and gaming subscription software) skyrocketed 65% year-over-year in the company’s fourth quarter. For comparison, the Xbox unit only grew 2% year-over-year in Microsoft’s previous quarter

“It is simply a breakthrough quarter for gaming,” CEO Satya Nadella said during a call with analysts. 

Although Nadella didn’t reveal specific numbers, he said that the company’s Xbox Game Pass subscription service “is seeing record subscribers.” In April, Microsoft said it now has 10 million Game Pass subscribers who use the service to download and play video games online and interact with others. Earlier this month, Microsoft said it would let subscribers of the premium version of Game Pass access the experimental xCloud cloud gaming service—which lets people stream games to their smartphones or tablets, among other features—for free. That was a big deal because Microsoft, like rivals including Google and Amazon, believes cloud gaming represents a potentially massive future business.

But just because Microsoft is investing in cloud gaming doesn’t mean it’s forsaking its Xbox gaming console business. The new version of its Xbox console, the Xbox Series X, is still slated to be released this fall, Nadella said.