Microsoft’s Latest Quarterly Earnings: What Singapore Big Tech Investors Need to Know

Microsoft stock

Tim Phillips

January 25, 2023

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Talk of recession. Another down year for US stocks. Corporate earnings deteriorating. The outlook for investors isn’t the most optimistic right now.

That’s why the latest earnings season in the US is a good chance to take a look at how the biggest companies in the world are faring.

Of course, among the biggest companies are technology-focused ones. One of the first tech firms to report its Q4 2022 earnings was Microsoft Corporation (NASDAQ: MSFT).

The cloud, office productivity and gaming giant – while still underperforming the S&P 500 Index in 2022 – has held up relatively better than many other “Big Tech” names.

So, what should tech and growth investors know about Microsoft’s latest earnings? And what does it all mean for the general picture of tech earnings going forward?

Azure cloud growth to slow further in 2023

Perhaps the biggest takeaway for investors was seen in the price action of the Microsoft stock after it reported earnings.

Microsoft shares had initially popped over 5% in after-hours trading, immediately following the release of better-than-expected numbers for the latest quarter.

However, as is always the case, the subsequent guidance from management proved to be the grounding factor.

A projected slowdown in its Azure cloud growth, given on the earnings call by Microsoft CFO Amy Hood, saw Microsoft shares fall back – actually giving back all the gains and declining around 1% by the end of the call.

Given Azure has been one of the main revenue growth drivers for Microsoft in recent years, it was no surprise that this was taken negatively by the market.

CFO Amy Hood said that Azure sales in the current quarter (Q1 2023) will slow by four to five percentage points, from the end of the quarter ending 31 December 2022.

Growth for Azure coming into the new year was in the mid-30s percentage range (in constant currency).

Signs of weaker spending in latest quarter

For tech investors, though, while Microsoft’s latest Q2 Fiscal Year 2023 (Q2 FY2023) results were respectable, there were some clear signs of a slowdown.

Revenue came in at US$52.7 billion for the period, up 2% year-on-year and was Microsoft’s slowest top-line growth rate since 2016.

This fell slightly short of analysts’ consensus expectations for US$53.1 billion but was within the range of what Microsoft management had guided.

Adjusted earnings per share (EPS) were US$2.32, slightly ahead of consensus expectations of US$2.29.

The weaker spending was most obvious in Microsoft’s More Personal Computing segment, which makes up its Windows, Xbox, Surface and search advertising businesses.

The division contributed US$14.2 billion in revenue, which was down 19% year-on-year. Its sales of Windows licenses to device makers fell 39% year-on-year, accelerating from a 15% decline in the prior quarter.

That has come as Gartner, a technology research firm, estimated that Q4 2022 saw the slowest growth in the global PC business since it started keeping track of the market in the mid-1990s.

However, this was offset by Microsoft’s Intelligent Cloud segment, which delivered US$21.5 billion in revenue, up 18% year-on-year.

This division includes the company’s Azure public cloud, Windows Server, SQL Server, and other cloud-based services.

CFO Amy Hood did highlight on the call that a slowdown, that started in December, should continue in the current quarter for Windows commercial products and cloud services.

Understanding the impact on broader tech

Microsoft is seen as a bellwether for the tech industry on trends ranging from enterprise IT spending to cloud computing spend.

As a result, the more downbeat tone of guidance from management could see other big technology firms – due to report over the next week – issue similar warnings.

Solid as Microsoft’s business is, it’s still not completely immune from any significant slowdown from a macroeconomic perspective. That much was clear in the company’s latest earnings. Still, the company’s path to success still looks strong.

For investors seeking structural exposure to the growth of cloud computing – but still wanting a dividend in the process – the latest set of numbers hasn’t fundamentally changed the bright long-term outlook for Microsoft shares.

 

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares of Microsoft Corporation.

About the Author: Tim Phillips

Tim Phillips
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer. In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.