Technology

Microsoft beats on earnings as cloud unit shows strong growth

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

Here’s how the company did:

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

Microsoft’s total revenue increased by 2% year over year in the quarter ending Dec. 31, the slowest rate 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 in connection with its decision to cut 10,000 jobs, revise its hardware lineup and consolidate leases. The charge includes $800 million in employee severance costs.

“We are focused on operational excellence as we continue to invest to drive growth,” Amy Hood, Microsoft’s finance chief, said in the statement.

Revenue in Microsoft’s Intelligent Cloud segment amounted to $21.51 billion, up 18% and slightly above the $21.44 billion consensus among analysts polled by StreetAccount. The unit 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, grew by 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 35%. Amazon shares rose 3% in after-hours trading following Microsoft’s announcement.

The Productivity and Business Processes segment, containing Microsoft 365 — formerly known as Office 365 — productivity software, LinkedIn and Dynamics, delivered $17 billion in revenue, up 7% and more than the StreetAccount consensus of $16.79 billion. The Teams communication app now has over 280 million monthly active users, CEO Satya Nadella said on a conference call with analysts.

The More Personal Computing segment featuring Windows, Xbox, Surface and search advertising contributed $14.24 billion, representing a revenue decline of 19%. Sales of Windows licenses to device makers declined some 39% year over year, decelerating from a decline of 15% in the fiscal first quarter. Technology industry researcher Gartner estimated that during the fourth quarter of 2022 the PC business had its slowest growth since the company started keeping track of the market in the mid-1990s.

The company said its devices group dealt with execution challenges for product launches during the quarter.

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

The decision to reduce headcount at Microsoft “shows a commitment to margin defense despite top-line shakiness,” analysts at Raymond James wrote in a note to clients Monday. They recommend buying Microsoft shares.

In the quarter, the U.S. Federal Trade Commission sued Microsoft to block its pending $69 billion acquisition of game publisher Activision Blizzard, while the U.S. Defense Department awarded Microsoft and three other companies a cloud contract worth up to $9 billion combined. “We are continuing to engage with regulators reviewing the transaction and are working toward closing it in fiscal year 2023, subject to obtaining required regulatory approvals and satisfaction of other customary closing conditions,” Microsoft said in a filing.

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

Executives will discuss its quarterly results with analysts and issue guidance on a conference call Tuesday starting at 5:30 p.m. 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 start Tuesday at 5:30 p.m. ET. A previous version gave an incorrect time.

WATCH: Longer term, Microsoft has a massive secular growth story, says Oppenheimer’s Horan

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