Microsoft Corp.‘s profit decreased by more than 12% during the holiday season, and officials warned on Tuesday that they anticipate a revenue slowdown at the end of 2022 to carry over into the new year as the business makes job cuts.
The prudence of consumers, according to Microsoft Chief Financial Officer Amy Hood, resulted in “moderating consumption growth in Azure and lower-than-expected growth in new business” in December. Hood continued, “We expect business patterns that we witnessed at the end of December to continue into” the current quarter. Accordingly, the estimated revenue will be at least $1 billion less than Wall Street anticipated. Before these announcements, Microsoft shares were up around 4% in after-hours trade as a consequence of investors’ excitement over holiday earnings that demonstrated robust cloud growth. But following Hood’s projection, the stock reversed course and, along with other tech firms that had surged in the extended period, went all the way into the red companies, like Amazon.com Inc.
Microsoft’s fiscal second-quarter earnings fell from $2.48 per share to $16.43 billion, or $2.20 per share. The business also disclosed that it incurred 12 cents per share in severance, impairment, and lease-consolidation costs, translating to adjusted earnings of $2.32 per share. Microsoft officials did not give adjusted earnings a year ago and normally report GAAP profit figures.
In the Christmas quarter of 2022, revenue grew to $52.75 billion from $51.7 billion. According to FactSet, analysts projected earnings of $2.29 per share on sales of $52.99 billion.
Microsoft executives estimate $50.5 billion to $51.5 billion in sales for the current quarter, based on Hood’s forecast. According to FactSet, analysts anticipated revenue of $52.42 billion for the third quarter of the current fiscal year.
Microsoft officials told investors at the conclusion of the previous fiscal year that they anticipate a double-digit percentage increase in sales and operating margins, but a lot has changed since then. As a result, this quarter’s projection from Microsoft is especially significant. After rapidly expanding their workforces in the early years of the COVID-19 pandemic, Big Tech firms like Microsoft last week announced thousands of layoffs as part of a wave of job cuts. The action, in the opinion of Wall Street analysts, indicated worries about revenue growth.
The actions taken by the company are an example of how Microsoft can dynamically adjust its cost base to preserve EPS and free cash flow given the macro choppy environment, Evercore ISI analysts wrote in a preview of the earnings, while maintaining an outperform rating and $280 target price on the stock. “We expect that the head-count reduction announcement… will likely be accompanied by a lower revenue outlook for the second half of the FY.
Instead, Microsoft executives highlight chances for expansion despite the drop in commercial spending. The business formally revealed a long-anticipated third investment in ChatGPT inventor OpenAI the day before its earnings release, with intentions to integrate the technology into services like Microsoft’s Azure cloud-computing platform and Bing search.
Beginning the company’s conference call, Microsoft CEO Satya Nadella stated, “In this environment, we remain convicted on three things. “Now is a crucial time for Microsoft to work with its customers to increase the value of their technology investments, foster long-term ties with them, and increase market share, all the while internally balancing our own cost structure with revenue growth. This thus positions us to take advantage of the secular trend, in which digital spending as a percentage of GDP will only rise. Finally, we will take the lead in the AI age since we are aware that platform shifts are when the most enterprise value is generated.
Despite having already paid $69 billion, Microsoft is still in the process of purchasing the massive gaming publisher Activision Blizzard Inc. is meeting resistance from authorities everywhere.
The Activision acquisition was discussed by analysts at Macquarie Research, who maintained a neutral rating but lowered their price target from $234 to $232. “We are particularly keen for updates on this deal, and would pay special attention to what sorts of concessions Microsoft is prepared to make at this point, and at what point the concessions make the deal unattractive to shareholders,” they wrote.
Accordingly, Microsoft’s cloud revenue came in at $21.5 billion, up from $18.33 billion a year earlier and well over the $21.43 billion average analyst projection. Microsoft does not disclose complete sales or profit data for Azure, despite the fact that Amazon and Alphabet Inc. do so for their competing cloud businesses. Azure rose by 31%, but experts expected the cloud computing product to rise by an average of 30.5%.
Despite Hood stating that Azure exited the quarter in the “mid-30s” following the December deceleration, executives estimate that percentage to drop four or five points in the upcoming quarter. Azure increased by 38% in constant currency, exceeding forecasts as well. Analysts anticipated a quarter-over-quarter increase in Azure of 27.8%, or 33.7% in constant currency.
Before the wild ride in the extended session, the price of Microsoft shares ended the day with a 0.2% loss at $242.04. In the last year, shares have plunged 18.4%, while the S&P 500 index has fallen 8.9%, and the Dow Jones Industrial Average, which includes Microsoft as one of its 30 components, has fallen 2.1%.