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Microsoft is experiencing a slowdown in the growth of its cloud computing business.
Gerard Julien/AFP via Getty Images
Microsoft
posted better-than-expected results for the December quarter based on the strength of cloud computing. But the strong results were tempered by disappointing guidance for the March quarter.
Microsoft (ticker: MSFT ) posted solid results in cloud computing and enterprise applications, even as the company saw weakness in its computer software business. In particular, public cloud business Azure beat Wall Street’s growth estimates, reassuring investors worried about the outlook for corporate IT spending.
The solid results could bolster hopes that the December quarter’s tech results may not be as bad as some on Wall Street had feared. Still, the company noted that US business was lighter than expected in the quarter, with commercial orders disappointing the Street and revenue guidance for the March quarter coming in light of Street estimates.
After initially rallying 5% in late trading shortly after the earnings release, the stock gave back most of those gains after the company issued on-call guidance.
For the second fiscal quarter ending at the end of December. 31, Microsoft reported $52.7 billion in revenue, up 2% from a year ago. That was slightly shy of Wall Street’s consensus view of $53.1 billion, but within the company’s guidance of $52.4 billion to $53.4 billion. On an adjusted basis, earnings were $2.32 a share, three cents better than the Wall Street consensus of $2.29. Gross margin was 66.8%, down slightly from 67.2% a year ago.
GAAP earnings were $2.20 per share. The difference is due to the company’s recent announcement of its plans reducing the workforce by 10,000 jobs, or slightly less than 5% of the total workforce. The company said in the December quarter it would take a $1.2 billion charge for severance costs, as well as unspecified changes to the company’s hardware portfolio and office consolidation.
The company repurchased $4.6 billion in shares in the quarter.
Microsoft also said commercial orders in the quarter rose 7% from a year ago, or 4% on a currency-adjusted basis; Orders fell 3% in the September quarter, but rose 16% in constant currency.
Microsoft said revenue from its Intelligent Cloud segment, which includes Azure, rose 18%, or 24% in constant currency, to $21.5 billion. That was toward the upper end of the company’s guidance of $21.25 billion to $21.55 billion. Azure revenue grew 31%, or 38% in constant currency.
The company reported total Microsoft Cloud revenue (which includes some additional items outside the Intelligence Cloud segment) rose 22%, or 29%, to $27.1 billion.
Microsoft said revenue from its Productivity and Business Processes segment rose 7%, or 13% currency-adjusted, to $17 billion; That was slightly above the forecast range of $16.6 billion to $16.9 billion.
The company said revenue from its larger personal computing segment fell 19%, or 16% in constant currency, to $14.2 billion, shy of the company’s forecast of $14.5 billion to $14.9 billion amid a sharp slowdown in the PC market. Windows OEM revenue fell 39%, while Xbox content and services revenue fell 12%. Revenue from devices, mainly Surface PCs, fell 39%. Excluding traffic acquisition costs, search and news advertising revenue increased 10%, or 15% on a currency-adjusted basis.
Research firm International Data Corp. estimated recently that is sent to the PC decreased by 28% year-on-year in the December quarter. What began as weakness in consumer PC demand has spread to the enterprise as companies cut IT spending amid the economic slowdown.
Guidance for the March quarter given by CFO Amy Hood on the company’s earnings conference call was mixed.
For the Productivity and Business Processes segment, the company sees constant currency growth of 11% to 13%, from $16.9 billion to $17.2 billion; The Street consensus was $16.9 billion.
For Intelligence Cloud, Microsoft is forecasting growth in the range of 17% to 19% in constant currency, or $21.7 billion to $22 billion, slightly below the Street consensus of $22.2 billion. The company expects constant currency growth in Azure to slow 4-5 points from the mid-30s at the end of the quarter, below the Street consensus estimate of 33.7% growth.
For More Personal Computing, the company sees revenue of $11.9 billion to $12.3 billion, well below the consensus estimate of $13.4 billion, as the PC market continues to shrink. Hood says device revenue in the quarter will decline by a percentage in the mid-40s.
Add that up and you get a $50.5 range. billion to $51.5 billion, below the Street consensus of $52.4 billion. Hood also noted that commercial orders in the quarter were likely to be flat at year-ago levels.
Write to Eric J. Savitz eric.savitz@barrons.com
