Microsoft projected second quarter revenue below Wall Street targets across its business units, stoking fear that macroeconomic headwinds are impacting the cloud business in addition to the PC unit.
Revenue growth in the first quarter was Microsoft’s lowest in five years, and shares of the software giant fell 7% in extended trading on Tuesday.
Microsoft’s cloud business, Azure, has supercharged revenue growth at the software giant for years. But in its first fiscal quarter of 2023, that growth dropped to 35% and the company projects that to drop again in the current quarter, which is its second quarter. Microsoft missed the 36.5% analyst target compiled by Visible Alpha due to a stronger dollar.
“If this growth deceleration continues, it could harm an investment case in the company’s stock, which is considered a safe-haven amid the market turmoil,” said Haris Anwar, senior analyst at Investing.com.
The company said it expects the Intelligent Cloud business to pull in revenue of US$21.25-billion to $21.55-billion in the second quarter, slightly below analysts’ estimates of $22.01-billion, according to Refinitiv IBES data.
“We expect Azure revenue growth to be sequentially lower by roughly five points on a constant currency basis,” chief financial officer Amy Hood told analysts on a conference call. That would be a growth of 37% on a constant currency basis, and much lower taking into account foreign exchange rates.
“In a weird way, everyone expected there to be a disaster when the pandemic hit. And it was the exact opposite. But at some point, that impact was going to hit and it’s hitting now,” said Bob O’Donnell, an analyst for TECHnalysis Research, adding that even businesses like the cloud can’t escape the impact. Still, he said Microsoft has diversified its business and is in a good position to ride out the hard times.
Slide in demand
The maker of Windows has seen demand slide for its ubiquitous computer software as the spike in inflation forces businesses and consumers to pull back on spending.
Current-quarter revenue from the personal computing unit was projected between $14.5-billion and $14.9-billion, below estimates of $16.96-billion.
“The PC market was worse than we expected in Q1,” said Brett Iversen, head of Microsoft’s investor relations. “We continued to see that deteriorate throughout the quarter, which impacted our Windows OEM business.”
The Windows OEM business, which includes the operating system software Microsoft sells to PC makers, dropped 15% year on year. Iversen said that part of the business did not have much of an impact from foreign-exchange headwinds and the drop was mainly PC-market driven.
Still, demand held up for its diverse portfolio of products including Outlook and Teams that have made Microsoft essential to businesses adopting flexible work models.
Revenue growth in the first quarter was $50.12-billion, up 11% year on year. The figure was slightly above analysts’ expectations of $49.61-billion. Net income fell to $17.56-billion, or $2.35/share, during the quarter ended 30 September, from $20.51-billion, or $2.71/share, a year earlier. — Tiyashi Datta, Aditya Soni, Jane Lanhee Lee, Devika Syamnath, Peter Henderson, Matthew Lewis and Lincoln Feast, (c) 2022 Reuters