Unlike Alphabet, Microsoft Said Something That The Market Was Not Happy To Hear

On Tuesday, Microsoft Corporation MSFT and Alphabet Inc GOOGGOOGL both reported their latest quarterly results. But while Google-parent topped expectations across the board, Microsoft’s guidance fell short of expectations, overshadowing the fact its fiscal fourth quarter results surpassed estimates.

Microsoft’s Fiscal Fourth Quarter Highlights

For the quarter that ended on June 30th, the software maker generated $56.19 billion in revenue that rose 8%, which topped Refinitiv’s consensus estimate of $55.47 billion. This is the third consecutive quarter that revenue growth is under 10% and this hasn’t happened since 2017. Microsoft made a net income of $20.08 billion while in 2022’s comparable quarter, it made $16.74 billion. Adjusted earnings amounted to $2.69 per share, topping $2.55 per share that Refinitiv expected.

Highlights

Intelligent cloud revenue rose 15% to $23.99 billion. Azure revenue rose grew even faster, 26% to be precise, but growth has slowed down compared to 40% from last year’s comparable quarter and 27% from the previous quarter. Considering that Azure competes with Google Cloud and Amazon.com Inc AMZN AWS, this is a red flag that worried investors, especially as Alphabet reported that its cloud revenue increased 28%.

Productivity and business processes, a segment that is home to Office software, LinkedIn and Dynamics, brought $18.29 billion to the revenue table, having increased 10%, topping Street Account’s consensus estimate of $18.06 billion.

The More Personal Computing segment contracted 4% but still topped estimates by posting $13.91 billion in revenue. 

Sales of Windows licenses to device makers also contracted by 12% due to the PC market slump but it was still better than what management expected.

Operating expenses increased about 2% in the quarter, in part because of a fine from Ireland’s Data Protection Commission that incurred because of LinkedIn violating the European Union’s General Data Protection Regulation.

Like Other Two Prominent Cloud Providers, Microsoft Trimmed Its Expenses

Like Amazon and Google, Microsoft had serious cost-control initatives. It trimmed its research and development spending for the first time since 2016. At the beginning of July, Microsoft CEO Satya Nadella even announced a new round of layoffs in addition to those announced in January that concerned 10,000 workers.

Gradual AI Growth

Azure OpenAI service that companies use to access tools expanded its customer userbase from 4,500 in May to more than 11,000 customers. CFO Amy Hood explained that the expected revenue boost from AI developments will be seen in the second half of the 2024 fiscal year. Although pricing for its AI service was revealed recently, it is still unknown when exactly will the Copilot assistant for Microsoft 365 productivity applications become available. While Google showed the many ways it can win on the AI front, Microsoft went for a more cautionary way of showing its confidence and optimism in the opportunities that lie ahead.

A Disappointing First Quarter Guidance

Microsoft guided for revenue in the range between $53.8 billion to $54.8 billion with the mid of the range implying an 8% growth and the range being short of Refinitiv’s consensus estimate of $54.94 billion. The operating segment featuring the Windows operating system was also guided lower than what Street Account analysts estimates as revenue range is expected between $12.5 billion to $12.9 billion, while analysts expected $13.22 billion.

Azure growth should be 25% to 26% in constant currency in the fiscal first quarter, with 2 percentage points deriving from AI services, 

Microsoft and Alphabet kicked off the Big Tech earnings season but unlike Alphabet, Google parent, who topped estimates across the board, Microsoft’s weaker than expected guidance spoiled its earnings release with stock going down 4% after hours.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.