Microsoft reported mixed financial results for their December quarter on Wednesday. This came as a shock to the tech company's investors, causing Microsoft stock to plummet in intraday trading. By contrast, the price swung between moderate losses and small gains during this time.
Microsoft posted impressive earnings for its second fiscal quarter. However, sales were light, which caused the Redmond, WA-based company to slightly surpass expectations. Also, Microsoft's revenue projections for the upcoming March quarter came in well below Wall Street expectations.
Microsoft's $52.7 billion in December quarter sales resulted in $2.32 adjusted earnings per share according to analysts polled by FactSet. The Microsoft team announced earnings of $2.29 a share on sales of $53 billion. This change in results is due to the year-over-year growth in both sales and Microsoft's profits.
Microsoft's earnings dropped for the first time in five years since the December quarter of 2017.
Because of the company's expected financial results, MSFT stock falls.
Microsoft stock closed the day down 0.6% to 240.61 on the stock market. In the morning, shares dropped as much as 4.6% before rebounding in the afternoon.
Compared to initial reports, Microsoft's Azure infrastructure and other cloud services grew faster during the last three months of 2016. However, this increase is slowing.
Microsoft Cloud revenue grew by 29% in real terms year over year. This is despite the fact that the service's commercial offerings drove more value for customers. CFO Amy Hood stated this in a press release.
In the December quarter of 2013, Microsoft's Intelligent Cloud segment had the highest revenue. Their revenue increased 18% from the previous year to $21.5 billion. This unit includes cloud services provided by Azure as well as server products.
Growth in revenue posted on Azure and other cloud services was higher than the views for 37% growth in constant currency. The growth was 42% in the previous quarter.
Microsoft's Productivity and Business Processes unit saw $17 billion in sales increase thanks to 7% growth. This included Office productivity software as well as the LinkedIn and Dynamics business programs.
Less positive sales figures for devices prompted a change in approach.
Microsoft's More Personal Computing unit decreased sales by 19% to $14.2 billion. This includes sales of Xbox video games, Windows PC software, Surface computers, internet search ads, and other related products.
Windows licensing revenue in the holiday season fell 39% due to decreased sales of PCs. Also declining was the income received from devices — which includes both PCs and smartphones — as well as Xbox content and services.
Q4 results turned out to be better than expected.
Analyst Brent Thill from Jefferies believes that Microsoft's numbers were better than expected. He recommends buying Microsoft stock with a price target of $275.
Microsoft forecast lower sales expectations than Wall Street analysts anticipated for the third quarter of their fiscal year.
Wall Street expected Microsoft's quarter-to-quarter sales to total $52.4 billion. However, the midpoint of their sales predictions was $51 billion, which was $1 billion lower than Wall Street's desired target. Last year's sales from Microsoft totaled $49.4 billion.
The company projected Azure sales growth would continue to slow down to about 31% or 31% in the current currency.
Analyst Keith Bachman from BMO Capital Markets dropped his rating from outperform to neutral on Microsoft stock on Wednesday. He explained the change by saying that the Azure cloud service was causing ongoing uncertainty in the markets.
Microsoft stock is expected to remain range-bound until Azure growth stabilizes, the analyst said. He lowered his price target on the stock to $265 from $267.
Microsoft News reports layoffs, AI investments.
Microsoft announced major layoffs and a cost-cutting plan last week. This led to a release of their earnings report the following week. The company reduced employment by approximately 4.5%— or 10,000 jobs — in one go. Microsoft incurred $1.2 billion in restructuring expenses and severance costs during the most recent quarter. This led to a $1.3 billion loss for the company, which decreased its earnings by 12 cents each share.
Microsoft stated that trends indicating tough economic circumstances led to reduced consumer spending.
Microsoft announced it would continue to add personnel and bolster their growth areas such as artificial intelligence and cloud computing.
Microsoft’s 2021 and 2019 investments in OpenAI text generator ChatGPT and image generator Dall-E total $10 billion. That’s the largest amount of money any company has invested in this startup. OpenAI is the organization behind the text and image generators that Microsoft chose to use.
Microsoft is adding OpenAI models to their consumer and enterprise software. Additionally, Microsoft is utilizing its Azure cloud computing system to support OpenAI's research.
Microsoft's stock has a mediocre average combined score.
Microsoft shares sit in second place out of six Computer Software-Desktop companies in IBD's Stock Checkup. Each composite industry rating system by IBD assigns Microsoft a 58 out of 99 mark.
IBD's Composite Rating combines five separate ratings into one easy-to-use score. The best growing stocks receive a score of 90 or higher on the composite rating.