Vicious Microsoft 20 percent Stock Gyrations After Lowers Cloud Guidance Reversing Gains to Losses

Software giant Microsoft stock took a whirlwind ride after it reported weaker than expected December 2022 (Q2 23) quarterly earnings Tuesday, with the market initially ignoring it on better cloud revenue (+38% constant currency vs +37% CC) However, that all fell apart after the earnings call. $MSFT lowered guidance, $50.5 billion to $51.5 billion in fiscal Q3 revenue vs analysts’ expectations for $52.43 billion. The stock gave back the entire initial earnings jump to go green to red, down over 7%. The move was reflected in index futures as Microsoft id seen as Bellwether of how the tech economy is going.

Microsoft Fiscal Fourth Quarter Earnings After Tuesday Close

Conference call: 5:30 p.m.

Microsoft operating income is down Q3, YTD and YoY. Cash provided by operations down 22% in Q3 YoY and 12% YTD YoY. Product revenue has fallen out of bed. MSFT sees revenue growth between 17%-19% for its Intelligent Cloud business.

Microsoft says ‘Hold my beer.’

The move was very close to the 200sma near $255 at its peak where it has been rejected four times now in this bear market.

Microsoft Q2 23 Earnings

“Just as we saw customers accelerate their digital spend during the pandemic, we are now seeing them optimize that spend,” CEO Satya Nadella told investors on a conference call late Tuesday. “Also, organizations are exercising caution given the macroeconomic uncertainty.”

Highlights

  • Net income fell 12% to $16.4 billion
  • EPS: Adjusted earnings fell 6.5% from last year to $2.32 per share, just ahead of consensus $2.30 per share.
  • Revenue: Rose 1.9% to $52.7 billion missing analysts’ estimates of $52.97 billion tally
  • Productivity & Business Revenue (includes Office 365): Rose 7% to $17 billion
  • Intelligent Cloud Revenue: Rose 18% to $21.5 billion
  • More Personal Computing revenues, (includes Windows) fell 19% to $14.2 billion
  • Commercial Cloud Revenue: $25.7B (exp $25.66B)
  • Gross margin 69.2% trailed StreetAccount consensus 69.8%.
  • Microsoft 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.
  • $MSFT $233.85 -16.81 (-6.71%) After hours

For the first time last quarter, revenue in the quarter from the Microsoft Cloud metric, encompassing Azure, commercial Office 365 subscriptions, commercial parts of LinkedIn and Dynamics 365, exceeded 50% of overall company revenue.

MSFT: Stock Market Reaction

  • $234.765 ▼-7.275(3.01%) Premarket
  • $234.765 ▼ -4.815(2.01%)) YTD
  • $234.765 ▼ -53.725(18.62%) Over year
  • $234.765 ▲ +144.765(160.85%) Over 5 years
  • 52wk High $313.66
  • 52wk Low $212.83

Microsoft like other American multinational had been hit by the soaring US dollar, though it has corrected some the strength of the U.S. currency means Microsoft’s sales abroad are less profitable on conversion.

Job Cuts

Last week Microsoft unveiled plans to slash around 5% of its global workforce as it looks to ‘align costs’ with customer demand and boost investment in areas such as AI and other advanced technologies. The company said severance payments and other costs linked to the cuts were at $800 million.

Microsoft said the cuts, which it expects to conclude in March, will result in the loss of around 10,000 jobs and a 12 cent hit to December quarter earnings, but added that it would continue to invest in areas such as AI and other advanced technologies.

OpenAI

Microsoft confirmed Monday it will expand its partnership in OpenAI, an artificial intelligence group founded by Tesla (TSLA) CEO Elon Musk, with a multibillion investment that extends its collaboration with OpenAI and its key consumer and business product, the ChatGPT chatbot.

Microsoft Cloud

  • Microsoft’s Intelligent Cloud business segment, which includes the Azure public cloud, as well as Windows Server, SQL Server, Nuance and Enterprise Services, generated $21.50 billion in quarterly revenue.
  • That’s up 18% as the company guided back in October.
  • Growth rate for Azure was 31% from last year which continues to decline following a recent run of advanced in the mid to high 40-percent range as companies pull back on digital infrastructure spending.
  • Growth in Azure consumption continued to moderate, and higher energy costs in the quarter hurt the gross margin of Azure.
  • “We are seeing customers exercise caution in this environment, and we saw results weaken through December,” said CFO Amy Hood. “We saw moderated consumption growth in Azure and lower-than-expected growth in new business across the stand-alone Office 365, EMS, and Windows commercial products that are sold outside the Microsoft 365 suite.”
  • “Azure and other cloud services revenue grew 31% and 38% in constant currency. As noted earlier, growth continued to moderate, particularly in December, and we exited the quarter with Azure constant-currency growth in the mid-30s,” she added. “From a geographic perspective, we saw strong execution in many regions around the world. However, performance in the U.S. was weaker than expected.”

Microsoft is the clear No. 2 provider of on-demand computing processing and storage behind market pioneer Amazon.com.

Productivity and Business Processes

  • Productivity and Business Processes segment that contains Microsoft 365 productivity software subscriptions (the company is in the midst of rebranding the bundle from Office 365), LinkedIn and Dynamics, had sales of $17 billion, up from $15.94 billion a year ago and beating the FactSet analyst consensus of $16.79 billion.

More Personal Computing

  • Microsoft’s personal-computer segment recorded $14.2 billion in revenue, down from $17.47 billion last year 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. Worldwide PC shipments were down 29% in the fourth quarter last year compared with the previous year, according to preliminary data from the research firm Gartner Inc. Financial analysts don’t expect that trend to improve until 2024.
  • Note that revenue from HoloLens augmented-reality devices will appear in the More Personal Computing segment instead of the Intelligent Cloud segment.
  • Videogaming revenue fell 12% during the quarter. Videogames and Microsoft’s Xbox videogame consoles are increasingly important businesses for the company. The videogaming industry is going through a slowdown as pandemic-related restrictions ease and people spend less time at home.
  • 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.
  • Last month the Federal Trade Commission sued to block the acquisition, saying the deal would give Microsoft the ability to control how consumers beyond users of its own Xbox consoles and subscription services access Activision’s games.
  • Microsoft filed a rebuttal saying the deal won’t hurt competition in the videogaming industry. It could take months before it is decided in the U.S. and elsewhere whether the deal can go through.
  • The company said it still expects the deal to close by June 30.

Outlook

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.

“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 spend 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.”

Source: MSFT

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