Microsoft Corp.’s profit declined more than 12% in the holiday season, and executives said Tuesday that a revenue deceleration at the end of 2022 is expected to continue into the new year as the company lays off workers.
Chief Financial Officer Amy Hood said in a conference call Tuesday that “we are seeing customers exercise caution,” which resulted in “moderating consumption growth in Azure and lower-than-expected growth in new business” in December. Hood then said that “we expect business trends that we saw at the end of December to continue into” the current quarter, and projected revenue will come in roughly $1 billion or more lower than Wall Street expected.
Microsoft shares had been trading about 4% higher in after-hours trading before those statements, as investors exhibited excitement at holiday results that showed resilient cloud growth. But the stock turned around after Hood’s forecast and fell all the way into the red, along with other tech stocks that had jumped in the extended session, such as Amazon.com Inc. amzn,
Microsoft reported fiscal second-quarter earnings of $16.43 billion, or $2.20 a share, a decline from $2.48 a share a year ago. The company also reported that severance, impairment and lease-consolidation charges cost it 12 cents a share, which would lead to adjusted earnings of $2.32 a share; Microsoft executives did not provide adjusted earnings a year ago, and typically stick to GAAP profit readings.
Revenue increased to $52.75 billion from $51.7 billion in the holiday quarter of 2022. Analysts on average expected earnings of $2.29 a share on sales of $52.99 billion, according to FactSet.
For the current quarter, Microsoft executives expect revenue of $50.5 billion to $51.5 billion, according to Hood’s guidance. Analysts on average were expecting fiscal third-quarter revenue of $52.42 billion, according to FactSet.
Microsoft’s forecast takes on extra importance this quarter, as Microsoft executives told investors at the end of the last fiscal year that they expect double-digit percentage growth in revenue and operating margins, but a lot has happened since then. Microsoft announced thousands of layoffs last week, part of a wave of job cuts from Big Tech companies that increased their workforces at a rapid pace in the early years of the COVID-19 pandemic. Wall Street analysts believed the move indicated concerns about revenue growth.
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“We expect that the head-count reduction announcement … will likely be accompanied by a lower revenue outlook for the second half of the FY, but the actions taken by the company are an illustration of how Microsoft can dynamically adjust its cost base to preserve EPS.” and free cash flow given the macro choppiness,” Evercore ISI analysts wrote in a preview of the earnings, while maintaining an superior rating and $280 target price on the stock.
Microsoft executives instead point to opportunities to grow despite the slowdown in business spending. The day before its earnings report, the company officially announced a long-expected third investment in ChatGPT creator OpenAI, which includes plans to incorporate the technology into services such as Microsoft’s Azure cloud-computing offering and Bing search engine.
Opinion: Microsoft’s big move in AI does not mean it will challenge Google in search
“In this environment, we remain convicted on three things,” Microsoft Chief Executive Satya Nadella said in launching the company’s conference call. “This is an important time for Microsoft to work with our customers, helping them realize more value from their tech spend and building long-term loyalty and share position while internally aligning our own cost structure with our revenue growth. This in turn sets us up to participate in the secular trend where digital spending as a percentage of GDP is only going to increase. And lastly, we are going to lead in the AI era, knowing that maximum enterprise value gets created during platform shifts.”
Microsoft is also still in the process of acquiring videogame-publishing giant Activision Blizzard Inc. atv,
for $69 billion, though it is facing pushback from regulators worldwide.
“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,” Macquarie Research analysts wrote of the Activision acquisition, while maintaining a neutral rating but decreasing their price target to $232 from $234.
Microsoft reported cloud revenue of $21.5 billion, up from $18.33 billion a year ago and narrowly topping the average analyst estimate of $21.43 billion, according to FactSet. Azure grew 31%, while analysts on average were expecting 30.5% growth from the cloud-computing product; Microsoft does not provide full revenue or profit figures for Azure, even though Amazon and Alphabet Inc. google,
Provide such results for their rival cloud products.
For more: The cloud boom has hit its stormiest moment yet, and it is costing investors billions
Azure grew by 38% in constant currency, also topping expectations, but Hood said that it exited the quarter in the “mid-30s” after the December deceleration, and executives expect that percentage to fall four or five points in the current quarter. Analysts were projecting Azure growth of 27.8% for the quarter, or 33.7% in constant currency, according to FactSet.
Microsoft’s personal-computer segment recorded $14.2 billion in revenue, down from $17.47 billion in the previous holiday season and missing the average analyst estimate of $14.76 billion. PC shipments suffered their worst decline ever recorded in the holiday season, according to third-party analyses, after a boom in PC sales during 2020 and 2021.
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Microsoft’s enterprise-software business had sales of $17 billion, up from $15.94 billion a year ago and beating the FactSet analyst consensus of $16.79 billion.
Microsoft stock finished the day with a 0.2% decline at $242.04, before the rollercoaster ride in the extended session. Shares have declined 18.4% in the past 12 months, as the S&P 500 index SPX,
has dropped 8.9% and the Dow Jones Industrial Average DJIA,
— which counts Microsoft as one of its 30 components — has declined by 2.1%.