MSFT Stock: Microsoft Cloud Services Fuel Earnings Beat


Microsoft ( MSFT ) shares fell on Wednesday after the company reported mixed results and disappointing guidance for the December quarter. MSFT shares fell more than 3% on the news.




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The Redmond, Wash.-based company beat earnings expectations for its fiscal second quarter on Tuesday, but sales were light. Also, its revenue forecast for the March quarter was well below Wall Street estimates.

Microsoft earned an adjusted $2.32 per share on sales of $52.7 billion in the December quarter. Analysts polled by FactSet had expected Microsoft to post a profit of $2.29 on sales of $53 billion. For the year, Microsoft’s revenues fell 6%, while sales rose 2%.

It was the first decline in Microsoft’s earnings in five years since the December 2017 quarter.

MSFT Shares Fall on Outlook

MSFT shares fell 3.5% to 233.66 in morning trading on the stock exchange today. Shares of MSFT fell 0.2% to close at 242.04 during the regular session on Tuesday.

In the December quarter, Microsoft’s Azure infrastructure and other cloud computing services showed higher-than-expected growth over the period. However, Azure growth is slowing.

“Microsoft Cloud revenue was $27.1 billion, up 22% year-over-year (up 29% in constant currency), as our commercial offerings continue to create value for our customers,” Chief Financial Officer Amy Hood said in a press release.

Of Microsoft’s three business segments, Intelligent Cloud had the highest performance in the December quarter. Segment revenue increased 18% year-on-year to $21.5 billion. The division includes server products and cloud services such as Azure.

Azure and other cloud services posted revenue growth of 31%, or 38% in constant currency. That beat views for a 37% increase in constant currency. The increase in the last quarter was 42%.

Meanwhile, Microsoft’s Productivity and Business Process division reported a 7% increase in sales to $17 billion. The division includes Office productivity software, as well as Dynamics and LinkedIn businesses.

Windows PC, Device Sales Weak

And finally, Microsoft’s More Personal Computing division saw sales fall 19% to $14.2 billion. The division includes Windows PC software, Xbox video games, Surface computers, Internet search and advertising.

Windows licensing revenue fell 39% in the holiday sales quarter amid lower PC sales. The revenue of devices also decreased by 39%. Xbox content and services revenues fell 12% during this period.

Jefferies analyst Brent Thill said Microsoft’s results were “better than scary.” He rates MSFT stock as a buy with a price target of 280.

On a conference call with analysts, Microsoft executives forecast sales for the fiscal third quarter below Wall Street estimates.

Microsoft forecast sales for the current quarter to be $50.5-$51.5 billion. The $51 billion midpoint was well below Wall Street’s $52.4 billion target for the March quarter. In the same quarter last year, Microsoft had sales of $49.4 billion.

The company also predicts that Azure sales growth will continue to slow to around 30% or 31% in constant currency.

Microsoft News: Layoffs, AI Investments

The earnings report comes after Microsoft announced major layoffs and a cost-cutting plan last week. The company is cutting 10,000 jobs, or about 4.5% of its workforce. Microsoft took a $1.2 billion charge related to severance costs and other restructuring costs in the quarter just ended. That cut earnings by 12 cents a share.

Microsoft also warned that customers are cutting back on spending amid tough macroeconomic conditions.

At the same time, Microsoft said it will continue to add employees and invest in growth areas such as cloud computing and artificial intelligence.

On Monday, Microsoft announced a new $10 billion investment in artificial intelligence startup OpenAI. OpenAI is the organization behind the text generator ChatGPT and the image generator Dall-E. Microsoft previously invested in OpenAI in 2019 and 2021.

Microsoft provides the Azure cloud computing infrastructure for OpenAI. It also adds OpenAI models to consumer and enterprise software products.

MSFT Shares have an Average Composite Rating

MSFT stock ranks second among six stocks in IBD’s Computer Software-Desktop industry group, according to IBD Stock Checkup. It has an average IBD Composite Rating of 58 out of 99.

IBD’s Composite Rating combines five separate property ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or higher.

Follow Patrick Seitz on Twitter @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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