By Jay Greene 

Microsoft Corp., a rare tech stalwart that has appeared to be making a deft transition to the new world of Web-based, on-demand computing, faltered in the most recent quarter as the growth of its cloud business slowed.

Revenue from Microsoft's Intelligent Cloud segment, which includes its Azure on-demand computing services as well as its older server software sales, grew 3% to $6.1 billion. The gain was 8% in constant currency, and the company said that Azure grew 120% in constant currency.

But just one quarter earlier, the same segment grew 5%, or 11% in constant currency, and Azure was up 140%.

"That's deceleration, for sure," said Brendan Barnicle, an analyst at Pacific Crest Securities. However, Mr. Barnicle noted that Azure represents only a fraction of overall revenue and is relatively new. "Those numbers are still so small, and it's still so early," he said.

Microsoft also missed analyst forecasts for profit in its third quarter. Adjusted per-share profit was flat at 62 cents, 2 cents below what analysts surveyed by Thomson Reuters expected.

Microsoft Chief Financial Officer Amy Hood attributed the miss to a "catch up" tax adjustment to account for an expected increase in the full-year tax rate. Earnings per share are "closer to 66 cents when you take out the tax," Ms. Hood said in an interview.

The slowing growth in cloud computing coupled with the earnings miss spooked investors. Shares traded after hours fell about 5.5% to $52.70.

Sales of Windows have tracked the declining PC industry, though the company's More Personal Computing segment, which includes the flagship operating system, has been a bit more resilient. Revenue in the segment edged up 0.9% to $9.46 billion, while operating profit jumped 57%.

Uptake of Windows 10, the latest version, has been more rapid than any previous version. Still, Windows revenue from computer makers declined 2% in constant currency. Microsoft last month said 270 million active devices run the new version, though many of those are free upgrades that bring no revenue.

Microsoft's own Surface line of computers remains a bright spot. Surface revenue increased 61% in constant currency and topped $1 billion for the second straight quarter for the first time outside of a holiday period, the company said.

In the segment that includes Microsoft's popular Office productivity software franchise, sales rose 1% to $6.52 billion -- but profit declined 6.6%.

One of the big growth engines for Microsoft has been its Office 365, the cloud version of its productivity software suite. (Revenue from Office 365 is lumped with the on-premises version of Office, not with other cloud businesses.)

Consumer users of Office 365 grew 79% year-over-year, while the number of commercial users climbed 57%, the company said.

Office 365's growth is an important metric because Microsoft is working hard to upsell those customers to other cloud services. Ms. Hood said Office 365 "helps pull along new usage of Azure."

One of those customers, Fruit of the Loom Inc., moved its email to Office 360 two years ago and started tinkering with Azure, using it for external websites and software development and testing.

The Bowling Green, Ky., apparel company was impressed with Azure's security and management features, enough that it began moving the disaster-and-recovery service for its business-management software to Azure in January, said Chris Krebs, Fruit of the Loom's chief information officer.

"Microsoft understands enterprise customer needs," he said.

For its fourth quarter, Microsoft projected its Productivity and Business Processes revenue at $6.5 billion to $6.7 billion "with continued annuity shift to the cloud, offsetting the impact of a weaker PC market," Ms. Hood said during a conference call with analysts.

Revenue for the Intelligent Cloud segment should come in between $6.5 billion and $6.7 billion. And Microsoft expects revenue in the More Personal Computing segment of $8.7 billion to $9 billion. All of those estimates are below analyst expectations.

Overall, Microsoft said its third-quarter net income fell to $3.76 billion, or 47 cents a share, down from $4.99 billion, or 61 cents a share, a year earlier.

Revenue slid 5.5% to $20.5 billion, and on an adjusted basis rose 1.6% to $22.08 billion.

Microsoft forecast fourth-quarter revenue at $21.7 billion to $22.4 billion.

Write to Jay Greene at Jay.Greene@wsj.com

 

(END) Dow Jones Newswires

April 21, 2016 19:26 ET (23:26 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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