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MSFT Stock: Microsoft Cloud Services Fuel Earnings Beat

Software giant Microsoft (MSFT) late Tuesday edged above expectations for earnings in its fiscal second quarter but sales were light. MSFT stock retreated after the company gave disappointing guidance.


The Redmond, Wash.-based company earned an adjusted $2.32 a share on sales of $52.7 billion in the December quarter. Analysts polled by FactSet had predicted Microsoft earnings of $2.29 a share on sales of $53 billion. On a year-over-year basis, Microsoft earnings slipped 6% while sales rose 2%.

It was the first drop in earnings for Microsoft in five years, since the December quarter of 2017.

But on the plus side, Microsoft’s Azure infrastructure and other cloud computing services posted higher growth than expected during the period.

“Microsoft Cloud revenue was $27.1 billion, up 22% (up 29% in constant currency) year over year as our commercial offerings continue to drive value for our customers,” Chief Financial Officer Amy Hood said in a news release.

MSFT Stock Retreats On Outlook

In after-hours trading on the stock market today, MSFT stock initially jumped but pulled back when the company offered a weak outlook. In recent trades, MSFT stock was down 0.5% to 240.77. During the regular session Tuesday, MSFT stock dipped 0.2% to close at 242.04.

Of Microsoft’s three business segments, Intelligent Cloud was the top performer in the December quarter. Revenue in the segment increased 18% year over year to $21.5 billion. The unit includes server products and cloud services such as Azure.

Azure and other cloud services posted revenue growth of 31%, or 38% in constant currency. That topped views for 37% growth in constant currency.

Meanwhile, Microsoft’s Productivity and Business Processes unit saw sales rise 7% to $17 billion. The division includes Office productivity software as well as the Dynamics and LinkedIn businesses.

Windows PC, Devices Sales Poor

And finally, Microsoft’s More Personal Computing unit saw sales decline 19% to $14.2 billion. The unit includes Windows PC software, Xbox video games, Surface computers, internet search and advertising.

Windows licensing revenue collapsed 39% in the holiday sales quarter amid declining PC sales. Devices revenue also fell by 39%. And Xbox content and services revenue decreased 12% in the period.

Jefferies analyst Brent Thill said Microsoft’s results were “better than feared.” He rates MSFT stock as buy with a price target of 280.

On a conference call with analysts, Microsoft executives forecast sales below Wall Street estimates for its fiscal third quarter.

Microsoft predicted sales of $50.5 billion to $51.5 billion for the current quarter. The midpoint of $51 billion was well below Wall Street’s target of $52.4 billion for the March quarter. In the same quarter last year, Microsoft generated sales of $49.4 billion.

The company also forecast continued deceleration of Azure sales growth.

Microsoft News: Layoffs, AI Investments

The earnings report comes after Microsoft announced major layoffs and a cost-cutting plan Wednesday. The company is eliminating 10,000 jobs, or about 4.5% of its workforce. Microsoft took a $1.2 billion charge in the just-finished quarter related to severance costs and other restructuring expenses. That lowered its earnings by 12 cents a share.

Microsoft also warned that customers were reducing their spending in a difficult macroeconomic climate.

At the same time, Microsoft said it will continue to add staff and invest in growth areas such as cloud computing and artificial intelligence.

On Monday, Microsoft announced a new investment, reportedly worth $10 billion, in artificial intelligence startup OpenAI. OpenAI is the organization behind text generator ChatGPT and image generator Dall-E. Microsoft previously invested in OpenAI in 2019 and 2021.

Microsoft is providing its Azure cloud computing infrastructure for OpenAI. It also is adding OpenAI models to its consumer and enterprise software products.

MSFT Stock Has Middling Composite Rating

MSFT stock ranks third out of six stocks in IBD’s Computer Software-Desktop industry group, according to IBD Stock Checkup. It has a middling IBD Composite Rating of 55 out of 99.

IBD’s Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.


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