UPDATED 21:01 EDT / JULY 26 2022

CLOUD

Microsoft calms investors with optimistic cloud forecast and its stock ticks up

Microsoft Corp.’s stock rose more than 4% in after-hour trading today after the software and cloud giant provided better-than-expected guidance for the year ahead.

The rise came despite the company posting fiscal fourth-quarter financial results that missed Wall Street’s expectations. The company reported net income of $16.74 billion for the quarter, up 2% from a year ago. Earnings came to $2.23 per share, below the consensus estimate of $2.29 per share, missing expectations for the first time since 2016.

Microsoft fell short on revenue too. Sales came to $51.87 billion, below the estimate of $52.44 billion, with growth of just 12% — the slowest the company has seen since 2020. Operating income rose 8%, to $20.5 billion.

Investors had been expecting the miss ever since last month, when Microsoft lowered its revenue forecast as a result of the strengthening U.S. dollar.

Microsoft’s stock fell almost 3% on the news, but it rebounded as investors digested the company’s forecast for the next quarter and fiscal year. Notably, the company maintained its full-year estimates and said it expects to see continued growth from cloud computing services.

Microsoft Chief Financial Officer Amy Hood said the company expects fiscal first-quarter 2023 revenue of between $49.25 billion and $50.25 billion, which is below Wall Street’s consensus of $51.44 billion. Although that forecast wasn’t too hot on the face of it, Hood offered investors some relief with her forecast of between $20.3 billion and $20.6 billion in revenue for Microsoft’s cloud business, in line with analyst’s expectations. She said Azure is expected to grow by 43% in constant-currency terms, an announcement that appears to have calmed concerns over slowing cloud growth.

As for Microsoft’s personal computer business, Hood said the company expects sales of $13 billion to $13.4 billion, versus the expected $13.81 billion. For software, Hood said she sees revenue of $15.95 billion to $16.25 billion, versus the $16.91 billion analyst forecast. Moreover, for the full year fiscal 2023, Hood said Microsoft maintains its expectations of double-digit percentage growth in both revenue and operating margins, in constant currency and in U.S. dollars.

Microsoft is facing pressure from a stronger greenback, since it gets about half of its revenue from outside the United States. It has plenty of other problems too, with the COVID-19-fueled PC sales boom appearing to wane, and concerns over the growth of cloud computing. Microsoft has already sent signals that it will be cutting back in the face of wider economic uncertainty, closing down some jobs and making selected workforce cuts.

Despite these pressures, the company wrapped up fiscal 2022 with revenue rising by 18%, to $198.27 billion, with profit up 18.7%, to $72.74 billion. Microsoft’s cloud computing business enjoyed a particularly strong quarter, with record bookings for Azure, according to Brett Iversen, the company’s general manager of investor relations.

Azure revenue grew by a healthy 40%, even if it missed Wall Street’s target of 43%. However, if foreign exchange factors are eliminated, Azure’s real growth was 46%, the company said. Intelligent Cloud revenue came to $20.9 billion, up 20%, ahead of Wall Street’s target of $19.1 billion. Microsoft does not provide a detailed breakdown of Azure revenue, but instead includes it with the Intelligent Cloud business alongside other cloud-based services.

“We are seeing larger and longer-term commitments and won a record number of $100 million-plus and $1 billion-plus deals this quarter,” Microsoft Chief Executive Satya Nadella (pictured) said in a conference call. “We have more data center regions than any other provider and we will launch 10 regions over the next year.”

Gordon McKenna, chief technology officer of Ensono LLC, a Microsoft partner, told SiliconANGLE that Azure’s strong performance in the quarter just gone, and the bullish forecast for next year, was not a surprise. He said that as organizations reevaluate their technology budgets in times of economic uncertainty, they tend to look to top platforms such as Azure to facilitate new digital transformation strategies.

“It’s no surprise this quarter’s revenue for Azure and other cloud services remain positive due to this rise in popularity of cloud adoption across most industries,” McKenna continued. “The cloud giant’s push for ‘vertical expressions’ in financial services, healthcare, manufacturing, retail, nonprofit and sustainability will without a doubt fuel continued growth as more organizations embark on their digital transformation journeys – especially in industries that are notoriously behind in tech adoption.”

Microsoft’s More Personal Computing division, which includes sales of the Windows operating system, Xbox consoles, Surface devices and Bing advertising revenues, generated $14.36 billion in sales, up from $14.09 billion a year earlier but below the forecast of $14.63 billion.

Meanwhile the Productivity and Business Processes unit, which includes the Office productivity software, Dynamics and LinkedIn, pulled in revenue of $16.6 billion, just below Wall Street’s forecast.

Constellation Research Inc. analyst Holger Mueller said that, like Google, Microsoft has been pulled down into teen growth numbers due to the loss of “pandemic effects” and an upcoming recession. At the same time, he said the stronger U.S. dollar has also impacted its bottom line.

“Not only did revenue grow at its slowest rate in two years, but Microsoft also missed the $200 billion mark in annual revenue, having been on track to hit that milestone earlier in the fiscal year,” Mueller said. “The growth engines for Microsoft are Azure, which is not surprising, server products and cloud services, plus LinkedIn and Dynamics 365, both of which were major surprises. Windows OEM and Xbox are the major two businesses that are not growing. The pressure is on Satya Nadella to create more interest in the company among investors, with the company’s stock now down more than the wider S&P Index.”

Analyst Charles King of Pund-IT Inc. told SiliconANGLE that Microsoft’s earnings report offers a snapshot of what happens when circumstances force both businesses and consumers to become cautious. Businesses tend to focus mainly on the products and services crucial to maintaining their operations and competitive edge, he explained, while consumers tend to emphasize “must have” purchases over “nice to have” products, such as new Xboxes and PCs. Those trends can be seen in Microsoft’s results, he added.

“Impacting all this are the currency fluctuations that are affecting many other global businesses and the continuing supply chain issues, particularly those complicated by China’s zero-COVID policy,” King said. “Overall, though, the breadth and depth of Microsoft’s solutions and services portfolios helped the company achieve an admirable balance in what were, by any measure, extremely challenging circumstances.”

The company said it lost $126 million in operating expenses from its decision to stop selling products and services in Russia.

During the quarter just gone, Nadella told employees they can expect to receive pay increases,. The company also launched new services to help customers deal with security issues.

Photo: Brian Smale/Microsoft

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