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Microsoft is experiencing slower growth in its cloud computing business.
Gerard Julien/AFP via Getty Images
Microsoft
Shares jumped late in trading on Tuesday after the company’s latest quarterly earnings came in slightly better than expected.
Results from the company’s Azure cloud unit were also slightly better than expected.
The stock rose 5% late in the session shortly after the earnings release.
Wall Street estimates called for sales of $53.1 billion for the December quarter and earnings of $2.29 per share.
This is breaking news. Read a snapshot of Microsoft’s earnings below and check back soon for more analysis.
Investors might feel a bit nervous ahead of Microsoft’s quarterly financial results. And for good reason.
Microsoft (ticker: MSFT) reports financial results for the December quarter after markets close on Tuesday. Two major issues are weighing on the company’s outlook.
For one thing, the personal computer market is slumping badly. Sales of PCs and related peripherals skyrocketed during the pandemic, but have since reversed course sharply. Research firm International Data Corp. recently felt that PC shipments were down 28% year over year in the December quarter. What started as weak demand for consumer PCs has spilled over to the enterprise as businesses cut back on IT spending amid a slowing economy.
Meanwhile, the growth of cloud computing is slowing. Cloud computing companies such as Microsoft Azure and Amazon Web Services are consumption-based, which means customers can reduce their cloud spending if they see their own business slowing down. This is part of the appeal of the cloud computing model.
Microsoft has seen slower revenue growth in its Azure business for several quarters: from around 50% growth as recently as the September 2021 quarter, to 35% in September 2022.
The single number likely to get the most attention from Wall Street will be currency-adjusted Azure growth. Growth in the September quarter was 42% on a currency-adjusted basis, compared to 46% in the June quarter. The Street is looking for growth of 36.8% in the December quarter, with a decline to 33.7% in the March quarter. On an unadjusted basis, the Street sees growth of 30.5% in the December quarter, declining to 27.8% in the March quarter.
One bright spot from the quarter for Microsoft — and other companies with significant non-US operations — is that the dollar’s recent surge against other currencies has abated. What has been a headwind could be a tailwind, at least relative to expectations.
Earlier this month, Microsoft announced plans to cut its workforce by 10,000 jobs, or just under 5% of the total workforce. “[A]As we have seen customers accelerate their digital spending during the pandemic, we are now seeing them optimize their digital spending to do more with less,” CEO Satya Nadella said in a blog post announcing the job cuts. “We are also seeing organizations across all sectors and regions treading cautiously as some parts of the world are in recession and others are anticipating one.”
The company said it would take $1.2 billion in charges in the December quarter for severance, as well as unspecified changes to the company’s hardware portfolio and office consolidation.
Microsoft’s revenue forecast for the December quarter is between $52.4 billion and $53.4 billion. The company provides specific advice for its three business segments, leaving it up to the street to add up from there. Microsoft forecasts revenue from the productivity and business process segment, which includes Office and other application software, to be between $16.6 billion and $16.9 billion. For the intelligent cloud business, which includes Azure, the company expects revenue of between $21.25 billion and $21.55 billion. For the more personal computing business, which includes games and Windows, the company projects revenue of $14.5 billion to $14.9 billion.
Estimates call for December quarter sales of $53.1 billion in sales and earnings of $2.29 per share. The Street sees revenue of $16.8 billion for the productivity and business process segment; $21.5 billion for smart cloud; and $15 billion for more personal computing.
For the March quarter, the Street sees total sales of $52.6 billion, including $16.9 billion in productivity and business processes, $22.3 billion in intelligent cloud and $13.6 billion for more personal computing, and earnings of $2.35 a share.
Microsoft shares fell 0.1% on Tuesday.
Write to Eric J. Savitz at [email protected]