Microsoft Surpasses Quarterly Estimates, Issues Weak Guidance For The Next Quarter

Shares of Microsoft dropped about 7 percent on Tuesday after the Big Tech company reported its fiscal first-quarter earnings report. Although it surpassed the quarterly estimate of analysts, it issued weak quarterly guidance and reported a softer cloud revenue for the quarter.

Microsoft reported earnings of $2.35 per share beating analysts’ expectation of $2.30 per share, according to Refinitiv. Revenue for the quarter came in at $50.12 billion while analysts had estimated, $49.61 billion, according to Refinitiv.

The company issued guidance for the fiscal second quarter. It expects revenue of between $52.35 billion to $53.35 billion in the next quarter. While this implies a 2 percent growth in the middle range, analysts expect revenue of $56.05 billion, according to Refinitiv. Microsoft’s also suggested operating margin for the fiscal second quarter was about 40%, narrower than the 42% consensus among analysts polled by StreetAccount.

According to the company’s statement, in the reported quarter, revenue increased 11 percent year over year. Microsoft’s CEO Satya Nadella while speaking on a conference call with analysts noted that cyclical trends are affecting the company’s consumer business. 

For the quarter, net income declined by 14 percent to $17.56 billion. The company had a $3.3 billion tax benefit in the same quarter from a year ago. Notably, Microsoft increased the useful lives of its servers and networking equipment from four to six years. This resulted in an $859 million blow to net income. The company’s gross margin of 69.2 percent was, however, closely behind StreetAccount’s estimate of 69.8 percent.

Its Intelligent Cloud business segment which houses the Azure public cloud, Windows Server, SQL Server, Nuance, and Enterprise Services generated revenue of $20.33 in the quarter, 20 percent up. Analysts had expected revenue of $20.36 billion, according to Street Account. 

Microsoft said that Azure revenue increased by 35 percent in the quarter, compared with a growth of 40 percent in the previous quarter. Analysts had expected a 36.9 percent growth in Azure revenue, according to StreetAccount. Chief Financial Officer Amy Hood said that Azure’s growth has continued to moderate and has been affected by higher energy costs. She also added that Azure growth is expected to fall sequentially by about 5 percent in constant currency, to about 37 percent. StreetAccount analysts had expected 39.4% Azure growth in constant currency.

Microsoft’s Productivity and Business Processes segment which covers Microsoft 365 productivity software subscriptions, LinkedIn, and Dynamics, generated revenue of $16.47 billion, up 9 percent and above the estimate of $16.13 billion by StreetAccount polls.

From its More Personal Computing segment which includes Windows, Xbox, Surface, and ads from the Bing search engine, Microsoft generated revenue of $13.33 billion surpassing the estimate of $13.12 billion, according to StreetAccount.

Revenue from the sales of Windows licenses to device makers declined 15 percent year over year, its lowest since 2015 and more than the single-digit outlook CFO Amy Hood gave in July. The CFO said that the weaker demand for PCs witnessed in September will continue to affect the company’s consumer business.

The Microsoft Cloud segment which houses Azure, commercial Office 365 subscriptions, commercial parts of LinkedIn, and Dynamics 365, surpassed 50 percent of the company’s total revenue for the first time. 

In the company’s statement, its CEO noted that “In this environment, we’re focused on helping our customers do more with less while investing in secular growth areas and managing our cost structure in a disciplined way.” Microsoft’s CFO also added that operating expenses should moderate materially during the 2023 fiscal year as the company will be placing a focus on improving employee productivity.