Microsoft (MSFT) fell Wednesday after the company reported mixed December quarter results and disappointing guidance. MSFT stock fell more than 3% on the news.
The Redmond, Wash.-based company beat expectations for profit in its second fiscal quarter on Tuesday, but sales were light. In addition, its revenue forecast for the March quarter is well below Wall Street estimates.
Microsoft earned $2.32 adjusted per share on sales of $52.7 billion in the December quarter. Analysts polled by FactSet had predicted Microsoft earnings of $2.29 a share on sales of $53 billion. Year over year, Microsoft’s profits fell 6% while sales increased 2%.
It was Microsoft’s first profit decline in five years, since the December 2017 quarter.
MSFT Stock falls on Outlook
In morning trading in the stock market today, MSFT stock fell 3.3% to 234.13. During Tuesday’s regular session, MSFT stock fell 0.2% to close at 242.04.
During the December quarter, Microsoft’s Azure infrastructure and other cloud services showed higher-than-expected growth over the period. However, Azure’s growth is slowing down.
“Microsoft Cloud revenue was $27.1 billion, up 22% (up 29% in constant currency) year-over-year as our commercial offerings continue to drive value for our customers,” Chief Financial Officer Amy Hood said in a press release.
Of Microsoft’s three business segments, Intelligent Cloud was the best performer in the December quarter. Segment revenue grew 18% year-over-year to $21.5 billion. The unit includes server products and cloud services such as Azure.
Azure and other cloud services showed revenue growth of 31%, or 38% in constant currency. This topped views for 37% growth in constant currency.
Meanwhile, Microsoft’s Productivity and Business Processes unit saw sales rise 7% to $17 billion. The division includes Office productivity software as well as Dynamics and LinkedIn businesses.
Windows PC, poor device sales
And finally, Microsoft’s More Personal Computing unit saw sales drop 19% to $14.2 billion. The unit includes Windows PC software, Xbox video games, Surface computers, Internet search and advertising.
Windows licensing revenue slumped 39% in the holiday sales quarter amid falling PC sales. Device revenue also fell by 39%. And Xbox content and services revenue was down 12% during the period.
Jefferies analyst Brent Thill said Microsoft’s results were “better than expected.” He rates MSFT stock as long with a price target of 280.
In a conference call with analysts, Microsoft executives forecast sales below Wall Street estimates for its fiscal third quarter.
Microsoft forecast sales of $50.5 billion to $51.5 billion for the current quarter. The midpoint of $51 billion was well below Wall Street’s target of $52.4 billion for the March quarter. In the same quarter last year, Microsoft generated sales of $49.4 billion.
The company also expects a continued deceleration in Azure sales growth.
Microsoft News: Layoffs, Investments in AI
The earnings report came after Microsoft announced significant layoffs and a cost-cutting plan last week. The company is cutting 10,000 jobs, or about 4.5% of its workforce. Microsoft took a charge of $1.2 billion in the quarter just ended due to severance and other restructuring expenses. This reduced its earnings by 12 cents per share.
Microsoft also warned that customers were cutting spending amid a tough macroeconomic climate.
At the same time, Microsoft said it will continue to add staff and invest in growth areas such as cloud computing and artificial intelligence.
On Monday, Microsoft announced a new investment, worth $10 billion, in artificial intelligence startup OpenAI. OpenAI is the organization behind the ChatGPT text generator and the Dall-E image generator. Microsoft previously invested in OpenAI in 2019 and 2021.
Microsoft provides its Azure cloud computing infrastructure for OpenAI. It also adds OpenAI models to its consumer and enterprise software products.
MSFT stock has an average composite rating
According to IBD Stock Checkup, MSFT stock ranks second out of six stocks in IBD’s Computer Software-Desktop industry group. It has an average IBD composite rating of 58 out of 99.
IBD’s Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a composite rating of 90 or higher.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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