Microsoft beats on earnings as cloud unit shows strong growth

Microsoft shares rose as much as 5% in extended trading Tuesday after the company reported fiscal second-quarter earnings that beat analysts’ estimates.

Here’s how the company fared:

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• Earnings: $2.32 per share adjusted, versus $2.29 per share as expected by analysts, according to Refinitiv.
• Income: $52.75 billion, versus the $52.94 billion analysts expected, according to Refinitiv.

Microsoft’s total revenue rose 2 percent year over year in the quarter ended Dec. 31, the slowest pace since 2016, according to a statement. Net income fell to $16.43 billion from $18.77 billion in the year-ago quarter. The company took a $1.2 billion charge in the quarter related to its decision to cut 10,000 jobs, overhaul its hardware lineup and consolidate leases. The charge included $800 million in employee benefits costs.

Business weakened in December, including growth in consumption of Azure cloud services, Microsoft CFO Amy Hood said on a conference call with analysts. This month, new business growth was lower than guidance expected for Microsoft 365 productivity software subscriptions, commercial Windows products and enterprise mobility and security offerings, Hood said.

Revenue in Microsoft’s Intelligent Cloud segment came in at $21.51 billion, up 18% and slightly above the consensus of $21.44 billion among analysts polled by StreetAccount. The appliance includes the Azure public cloud, Windows Server, SQL Server, Nuance and Enterprise Services. Revenue from Azure and other cloud services, which Microsoft does not report in dollars, rose 31%, slightly above the estimate of just under 31% that analysts polled by CNBC and StreetAccount had expected. In the previous quarter, the category grew by 35%. Amazon shares rose 3% in after-hours trading after Microsoft’s announcement.

The productivity and business process segment, which includes Microsoft 365 (formerly Office 365), LinkedIn and Dynamics, brought in $17 billion in revenue, up 7% from the StreetAccount consensus of $16.79 billion. Communications app Teams now has more than 280 million monthly active users, CEO Satya Nadella said on the conference call.

The More Personal Computing segment, which includes Windows, Xbox, Surface and search advertising, contributed $14.24 billion, a 19% revenue decline. Windows license sales to device makers fell about 39% year over year, slowing from a 15% decline in the first fiscal quarter. Technology industry researcher Gartner estimated that in the fourth quarter of 2022, the PC business had its slowest growth since the company began tracking the market in the mid-1990s.

Hood said his Surface group dealt with performance challenges during the quarter in which the company introduced the Surface Pro 9.

Nadella said Microsoft collected more than $20 billion in security revenue in 2022, up about 33 percent from 2021, when the growth rate was about 45 percent.

Microsoft’s report kicked off the earnings season for mega-cap tech companies, with the Nasdaq posting its worst year since 2008 and its first decline in four quarters since the dot-com crash. Along with layoffs at Microsoft, Amazon, Alphabet and Meta all announced significant job cuts recently after hiring rapidly during the Covid pandemic and the extended tech bull market. Meta is scheduled to report results next Wednesday, followed a day later by Alphabet, Amazon and An apple.

The decision to cut Microsoft’s workforce “shows a commitment to margin protection despite top-line volatility,” analysts at Raymond James wrote in a note to clients on Monday. They recommend buying Microsoft stock.

In the quarter, the US Federal Trade Commission sued Microsoft to block its expected $69 billion acquisition of the game publisher Activision Blizzard, while the US Department of Defense awarded Microsoft and three other companies a cloud contract worth a total of up to $9 billion. “We remain engaged with the regulatory review of the transaction and are working to close it in fiscal 2023, subject to obtaining the necessary regulatory approvals and satisfying other customary closing conditions,” Microsoft said in a filing.

Excluding the after-hours move, Microsoft shares are flat so far this year, while the S&P 500 is up 4%.

Executives will discuss quarterly results with analysts and issue guidance on a conference call on Tuesday beginning at 5:30 PM ET.

This is breaking news. Please check back for updates.

Correction: This story has been updated to reflect that Microsoft’s conference call with analysts will begin on Tuesday at 5:30 PM ET. A previous version gave an incorrect time.

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