Microsoft's Earnings Beat Expectations Thanks to Solid Cloud Results

Microsoft posted better-than-expected results for the December quarter, driven by strength in cloud computing. However, the strong results were tempered by disappointing guidance for the March quarter, causing the stock to drop.

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Microsoft (ticker: MSFT) posted solid results in cloud computing and enterprise applications, despite weakness in its PC software business. In particular, the Azure public cloud business beat Wall Street growth estimates, which is a relief to investors nervous about the outlook for corporate IT spending.

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The strong results could give hope that December quarter tech results might not be as bad as some on Wall Street had feared. However, the company noted that U.S. business in the quarter was lighter than expected, commercial orders disappointed the Street, and March quarter revenue guidance came in below Street estimates.
After initially rallying 5% in late trading shortly after the earnings release, the shares gave back most of those gains once the company provided guidance on the call. Microsoft stock was down 2.4% in premarket trading Wednesday.

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Microsoft's revenue for its fiscal second quarter ended December 31 was $52.7 billion, up 2% from the previous year. This was just below the Wall Street consensus estimate of $53.1 billion, but within the company's guidance range of $52.4 billion to $53.4 billion. Adjusted profits were $2.32 per share, beating the consensus estimate of $2.29 per share by three cents. Gross margin was 66.8%, down slightly from 67.2% the previous year.

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Profits on a GAAP basis were $2.20 per share. The difference is due to the company's recent announcement of plans to reduce its workforce by 10,000 jobs. This represents a little under 5% of the total workforce. The company said it would take $1.2 billion in charges in the December quarter for severance costs, as well as unspecified changes to the company's hardware portfolio and office consolidation.

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Microsoft has joined the ranks of Amazon, Salesforce and Google-parent Alphabet by announcing job cuts for the new year.
The company repurchased $4.6 billion worth of stock during the quarter.

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Microsoft reported that commercial bookings in the quarter were up 7% from a year ago, or 4% adjusted for currency; September quarter bookings were down 3%, but up 16% in constant currency. Microsoft reported that its Intelligent Cloud segment, which includes Azure, generated $21.5 billion in revenue, up 18% from the previous year. Azure revenue was up 31%, representing strong growth for the company's cloud platform.

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Microsoft reported that its total cloud revenue for the year was $27.1 billion, up 22% from the previous year. When adjusted for currency, this figure represents a 29% increase. The company attributed this growth to strong performance in its Intelligence Cloud segment, which includes products like Azure and Office 365.
Microsoft reported that its Productivity and Business Processes segment generated $17 billion in revenue, up 7% from the previous year. When adjusted for currency, the segment's revenue was up 13%. This was slightly above the company's forecast range of $16.6 billion to $16.9 billion.

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The company said that its More Personal Computing segment saw revenue of $14.2 billion, a decrease of 19% (or 16% in constant currency). This was below the company's forecast range of $14.5-$14.9 billion, due to a sharp slowdown in the personal computer market. Windows OEM revenue was down 39%, while Xbox content and services revenue was off 12%. Devices revenue (mostly from Surface PCs) was also down 39%. However, search and news advertising revenue (excluding traffic acquisition costs) was up 10% (or 15% when adjusted for currency).

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According to research firm International Data Corp., PC sales plunged 28% in the fourth quarter of 2020. This marks a significant decline from the previous quarter, when sales had been boosted by the pandemic. Every major PC maker was affected by the downturn, with Apple faring better than HP and Dell. It is expected that the decline in PC sales will continue into 2021, as companies trim their IT spending in response to the economic slowdown.
Sales of PCs fell in the last quarter of 2022, with Apple faring better than HP and Dell.

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Amy Hood, the company's CFO, provided mixed guidance for the March quarter during the company's earnings conference call.
The company expects to see constant currency growth of 11% to 13% in its Productivity and Business Processes segment, to a total of between $16.9 billion and $17.2 billion. This is higher than the Street consensus of $16.9 billion.

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Microsoft projects that its Intelligence Cloud business will grow by 17% to 19% in constant currency, or by $21.7 billion to $22 billion. This is a little below the Street consensus of $22.2 billion. The company expects Azure to grow at a rate of 4 to 5 points below its current growth rate of 33.7%, which is below Street consensus.
The company expects revenue of between $11.9 billion and $12.3 billion for More Personal Computing, which is below consensus at $13.4 billion. This is due to the continued shrinkage of the PC market. Hood says that device revenue will be down by around 40% in the quarter.

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This gives a range of $50.5 to $51.5 billion, which is below the Street consensus of $52.4 billion. Hood also mentioned that commercial orders in the upcoming quarters are likely to be around the same as they were last year.