Microsoft experienced a decline in shares of up to 4% during after-hours trading on Tuesday due to the company’s quarterly revenue guidance falling short of analysts’ expectations. The software maker reported earnings of $2.69 per share, surpassing the expected $2.55 per share predicted by Refinitiv. However, revenue came in at $56.19 billion, slightly below the expected $55.47 billion. During a conference call with analysts, Amy Hood, Microsoft’s finance chief, projected a fiscal first-quarter revenue range of $53.8 billion to $54.8 billion. The midpoint of this range, $54.30 billion, indicated an 8% growth rate, falling short of the consensus estimate of $54.94 billion among analysts surveyed by Refinitiv. The segment featuring the Windows operating system also underperformed, with projected revenue of $12.5 billion to $12.9 billion, below the anticipated $13.22 billion.
Revenue for the fiscal fourth quarter, which concluded on June 30, increased by 8% compared to the previous year, according to a statement released by the company. This marks the third consecutive quarter where growth has fallen below 10%, a trend not seen since 2017. Net income for the quarter reached $20.08 billion, up from $16.74 billion, or $2.23 per share, in the same quarter of the prior year.
Strong Performance from Microsoft’s Intelligent Cloud Segment
The Intelligent Cloud segment of Microsoft’s business contributed $23.99 billion in revenue, demonstrating a 15% increase and surpassing the consensus estimate of $23.79 billion among analysts surveyed by StreetAccount. This segment encompasses various components such as the Azure public cloud, SQL Server, Windows Server, Visual Studio, Nuance, GitHub, and enterprise services. Azure revenue experienced a growth rate of 26% during the quarter, surpassing the previous quarter’s growth rate of 27% and the year-ago quarter’s growth rate of 40%. Analysts had anticipated a 25% growth rate for Azure, which competes with Amazon Web Services and Google Cloud Platform.
Microsoft CEO Satya Nadella revealed in a conference call with analysts that “Microsoft Cloud surpassed $110 billion in annual revenue, up 27% in constant currency, with Azure accounting for more than 50% of the total for the first time.” In comparison, Google’s parent company, Alphabet, announced a 28% increase in revenue from its cloud products, which include Google Workspace and Google Cloud Platform.
Cloud Service Providers Adjust to Economic Concerns
Due to concerns about a deteriorating economy, organizations utilizing cloud services from Microsoft, Amazon, and Google have taken measures to optimize their existing workloads and reduce costs in recent months. Amy Hood acknowledged this trend, stating, “As expected in Azure, we saw a continuation of the optimization and new workload trends from the prior quarter.”
To adapt to the changing landscape, the three major U.S. cloud providers have decreased their own expenses. Microsoft’s research and development costs declined year over year for the first time since 2016. Additionally, the company announced that salaries would not be increased in the current year, and job cuts were implemented separately from the earlier round of layoffs that affected 10,000 employees.
Segment Performances and Future Outlook
Microsoft’s productivity and business processes segment, which includes Office productivity software, LinkedIn, and Dynamics, generated $18.29 billion in revenue, surpassing the StreetAccount consensus of $18.06 billion with a 10% increase. The More Personal Computing segment, which encompasses Windows, devices, gaming, and search advertising, reported $13.91 billion in revenue, a 4% decline compared to the previous year, yet exceeding the StreetAccount consensus of $13.58 billion.
Sales of Windows licenses to device manufacturers decreased by 12%, which was better than expected. The surge in PC purchases following the onset of the Covid pandemic made year-over-year comparisons challenging. According to technology industry researcher Gartner, PC shipments, including MacBooks, fell approximately 17% during the quarter.
Investors are closely monitoring Microsoft’s pending acquisition of Activision Blizzard for nearly $69 billion, which was agreed upon in January 2022. An appeals court recently denied the Federal Trade Commission’s motion to halt the transaction, leading to increased optimism that the deal will be finalized. Microsoft’s operating expenses rose about 2% in the quarter, partially due to a fine imposed by Ireland’s Data Protection Commission related to the possible violation of the European Union’s General Data Protection Regulation by Microsoft’s LinkedIn unit.
Looking ahead, Microsoft is capitalizing on the growing interest in artificial intelligence (AI). The company has expanded its alliance with OpenAI and introduced a chatbot powered by OpenAI language models to assist workers in comprehending their employers’ data. Furthermore, Microsoft’s Azure OpenAI Service, which provides access to language models and developer tools, has experienced a significant increase in customers, from over 4,500 in May to over 11,000 currently.
Despite strong demand and a leadership position in AI services, Microsoft anticipates gradual growth as Azure AI scales and Copilots become readily available. The impact of higher revenue from AI services is expected in the second half of the 2024 fiscal year. Microsoft’s Azure growth for the fiscal first quarter is projected to be 25% to 26% in constant currency, with AI services contributing 2 percentage points compared to 1 point in the previous quarter.
In summary, Microsoft’s quarterly earnings and revenue fell short of analysts’ expectations, resulting in a decline in shares. However, the company’s Intelligent Cloud segment
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