Software giant Microsoft reported weaker than expected June 2022 quarterly earnings Tuesday, despite month’s profit warning. after the close as both revenue and earnings beat expectations. Microsoft Cloud segment saw a sharp slowdown, it had been MSFT’s robust engine with 50% or more year-over-year sales growth. Azure and other cloud services saw sales slowdown to 40% in the latest quarter. The software giant was also hit by declining videogame sales and the effects of strong dollar.
Microsoft Fiscal Fourth Quarter Earnings After Tuesday Close
$2.23 Missed EPS $2.29 Forecast and $51.9B Missed Revenue $52.45 Billion Forecast
Conference call: 5:30 p.m.
Earnings
Microsoft’s fiscal fourth-quarter 2022 net income was $16.7 billion suffering its slowest earnings growth in two years. Revenue rose by $51.9 billion, up 12% for the same period a year earlier, missing Wall Street expectations. Sales were affected by a number of other including supply-chain disruptions in China, scaling back operations in Russia after the country’s invasion of Ukraine and chaos in the digital advertising market.
Highlights
All of Microsoft’s segments produced lower growth than analysts expected in the last three months of the company’s fiscal year, however the company i guide higher. It does seem they threw out all the dirty bath water this quarter.
- Rev: $51.9B (exp $52.45B)
- Adj EPS: $2.23(exp $2.29)
- Q4 Commercial Cloud Rev. $25b, Est. $24.99b
- Q4 Productivity Rev $16.60b,Est. $16.68b
- Q4 More Personal Computing Rev. $14.36b, Est. $14.67b
- Q4 Intelligent Cloud Rev. $20.91b,Est. $21.07b
Forex Hit
Microsoft like other American multinational has been hit by the soaring US dollar, the strength of the U.S. currency means Microsoft’s sales abroad are less profitable on conversion. Just last week IBM in their earnings said the dollar’s strength had hurt them. Microsoft’s said the currency effect represented a $595 million hit to its top line in its profit warning last month.
Yesterday Walmart took a $1 billion charge for the USD dollar and warned on another $1.5 billion headwind for the rest of 2022. The WSJ Dollar Index, which tracks U.S. currency performance against other currencies, is up 10% since the beginning of the year.
Microsoft Cloud
- Revenue in Microsoft’s intelligent cloud growth moderated in the most recent quarters.
- Microsoft said Azure and other cloud services saw sales rise 40% in the latest quarter, with analysts surveyed by FactSet expecting a 43% advance.
Microsoft is the clear No. 2 provider of on-demand computing processing and storage behind market pioneer Amazon.com.
Advertising
- Microsoft’s advertising business sawn strength in the pandemic, though the digital ad-market more broadly has been in chaos recently.
- The company’s LinkedIn operations and other advertising revenue was down by more than $100 million.
- Netflix Inc. this month named Microsoft as a partner to build out its advertising-supported streaming business.
- Microsoft made $8.5 billion in search advertising sales in fiscal 2021, up more than 10% from the previous year.
Gaming
Microsoft went all in on the videogame sphere and is currently going through approvals for its $75 billion deal for Activision Blizzard Inc. On that note Britain’s antitrust regulator opened a probe into whether the takeover might reduce competition. The company said it still expects the deal to close by June 30 next year.
- MSFT’s videogame business that boomed during the pandemic had a 7% drop in sales year-over-year.
- Microsoft’s Xbox hardware sales fell 11%, and content and services were 6% lower, in part, it said, because of lower user engagement.
- CFO Amy Hood said revenue would likely decline again this quarter.
Windows
- Covid-19 had fed the adoption of cloud services and the sale of computers using its Windows operating system.
- Not unexpectantly in the most recent quarter PC shipments had their sharpest decline in three years. China disruptions and PC slowdown lowered Windows related revenue by $300 million, Microsoft said.
- Chief Executive Satya Nadella said on the earnings call that the company wasn’t immune to the current economic turmoil but added “IT spend is going to increase because every business is trying to fortify itself with digital tech to in some sense navigate this macro environment.”
Microsoft also reported that it returned $10.9 billion to shareholders in the form of share repurchases and dividends in the first quarter of fiscal year 2022, an increase of 14% compared to the first quarter of fiscal year 2021.
Outlook
Microsoft gave an upbeat outlook saying sales and operating income on a currency-adjusted basis should increase by a double-digit percentage, CFO Amy Hood said on the call. Microsoft shares jumped about 5% in late trading after the call. The sales outlook for the current quarter, she said, was for $49.25 billion to $50.25 billion.
“Microsoft is not showing signs of a major recession yet,” said Bernstein Research analyst Mark Moerdler.
Source: MSFT
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