Microsoft shares rise on optimistic forecasts for sales growth for 2023

(Bloomberg) — Microsoft provided an upbeat sales forecast for the just-starting fiscal year, easing investor concerns about growth that erupted after a lackluster fourth-quarter earnings report. Shares jumped more than 5% in late trading, reversing earlier declines.

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In a conference call on Tuesday, the software giant said it expects revenue and operating income to increase at a double pace for fiscal year 2023, which ends next June. Microsoft executives said currency fluctuations will reduce sales by about 4% for this year and about 5% in the current quarter, easing concerns that the US dollar will have a greater impact on the value of overseas sales.

Wedbush analyst Dan Ives said expectations were “shockingly strong”. Expectations “will be directions audible around the world and the street.”

Microsoft said it is attracting more big deals for its Azure cloud computing software and moving customers to more expensive versions of Office cloud software. The company’s expenses will slow as the year continues and the pace of hiring slows after adding 11,000 workers planned for the current period. CEO Satya Nadella said on the call that the turbulent economic picture will lead some customers to gravitate toward Microsoft products and cloud software in general because it can help them control what they spend on technology.

“After getting out of this macroeconomic crisis, the public cloud will be a bigger winner,” Nadella said.

Microsoft shares rose to $269.41 in extended trading after expectations. They fell about 2% immediately after the earnings report, having fallen to $251.90 at the close in New York. While the stock jumped 51% in 2021, it has fallen 25% so far this year amid a dip in big tech stocks.

Earlier, the company reported fourth-quarter sales and earnings that did not live up to analyst expectations, due to unfavorable currency rates and weak demand for cloud computing services, PC software and advertising on its online properties.

Revenue for the fourth quarter ended June 30 rose 12 percent to $51.9 billion, the software maker said in a statement. Net income increased to $16.7 billion, or $2.23 per share. On average, analysts estimated sales at $52.4 billion and $2.29 per share of profits, according to a Bloomberg survey. Revenue growth in Azure cloud computing services slowed to 40%, a closely watched rate that was not as predictable.

A stronger US dollar, which reduced the value of overseas sales, hurt revenue and earnings in the last quarter, prompting Microsoft to cut its forecast in early June. The company has slowed hiring in some departments, such as Azure and Office, which make computer productivity software. Overall sales rose to the lowest level since September 2020, as Azure’s growth rates continue to decline and the broader PC market is on course for an annual decline. Demand has slowed more in the past few weeks than a quarter of Microsoft, Derek Wood, an analyst at Cowen, said, as customers delayed purchases in anticipation of a possible global recession.

“After Memorial Day, things started to slow down and you started hearing more cautious buying behavior and longer sales cycles,” Wood said.

Analysts expected Azure revenue to rise 44%, according to a note from Jefferies. In the third quarter of the fiscal year, the division recorded 46% growth.

CFO Amy Hood said in an interview that excluding the currency impact, Azure’s growth was 1% lower than expected in April. However, the company has signed a record number of Azure contracts worth over $100 million and $1 billion, it said.

It said business bookings, a measure of future sales to business customers, were “significantly” better than the company had expected, up 25%, an indication that business demand for Microsoft software remained strong this quarter.

“We do most of the commercial reservations work in June,” Hood said. “It was a record quarter for us and much better than we had planned.”

Microsoft Corp., headquartered in Redmond, Washington, in June lowered its sales and profit forecast for the fourth quarter, blaming a stronger US dollar for $460 million in revenue. The software giant said on Tuesday that the effects of the currency in this period were more severe than expected. The war in Ukraine prompted the company to reduce its activity in Russia, which resulted in an accounting fee of $126 million. In addition, the discontinuation of hardware production in China and the deterioration of the PC market have hurt sales of Windows operating system software to PC manufacturers.

Microsoft also recorded $113 million in severance payments in the recent period. Earlier this month, Microsoft said it had cut less than 1% of its workforce of 180,000 people, affecting groups such as Consulting and Customer Solutions, but said it plans to end the current fiscal year with an increase in staff. The company has also eliminated many open jobs and slowed hiring including in the units that make Azure, Windows, Office and security software. The company said last week that these hiring restrictions will continue for the foreseeable future.

The company said in slides posted on its website that Microsoft’s total revenue from cloud products, which includes Azure and web-based versions of Office programs, rose 28% to $25 billion.

Alphabet Inc, parent company of Google, which also reported earnings on Tuesday, issued a similar cautionary note about hiring, as did Apple Inc. and Inc. Shareholders are closely scrutinizing the tech industry’s numbers for signs of waning demand. The two social media companies, Twitter Inc. and Snap Inc. Last week reported disappointing sales — and Microsoft said a drop in ad spend hurt results in its professional network on LinkedIn and in the search department.

Global PC shipments fell more than 15% in the quarter, according to IDC, although they remain well above pre-pandemic levels. Microsoft was able to generate higher revenue from PC software by shipping more and more expensive corporate versions of its software.

On the call, Microsoft executives said they expect continued weakness in the PC and advertising markets.

(Updates with comment from analyst in third paragraph, CEO in fifth paragraph.)

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