Microsoft’s slight earnings beat is not enough to lure us off the sidelines

Microsoft’s slight earnings beat is not enough to lure us off the sidelines

Microsoft (MSFT) delivered better second-quarter results than many on Wall Street anticipated, initially sending shares soaring in afterhours trading. But the stock retreated after management announced softer-than-expected guidance for the technology giant’s third quarter — underscoring our decision to remain sidelined buyers for now. Revenue for the three months ended Dec. 31 came in at $52.75 billion, slightly missing analysts’ forecasts of $52.94 billion, according to estimates from Refinitiv, even as revenue growth from the cloud computing unit, Azure, slightly outperformed expectations. Adjusted earnings-per-share of $2.32 a share beat analysts’ estimates by 3 cents. Bottom line Microsoft was able to pull off a quarter that was not as poor as feared, boosting shares 3% to 4% after the market closed. It was a welcomed, if brief, relief rally after weeks of uncertainty stemming from ever-lower revenue estimates, a layoff announcement that raised questions about the health of the business and negative sentiment voiced by CEO Satya Nadella over the state of the tech industry. So how did Microsoft manage to pull off this small earnings beat? For one, management guided for operating expenses to be around $14.39 billion to $14.49 billion on an adjusted basis, but the actual results were well below that — closer to $13.84 billion. The results are indicative of what we mean when calling for companies to pull back on expenses to protect earnings-per-share in a slowing, or even declining, revenue-growth environment. But Microsoft’s revenue outlook for its third quarter missed the mark. And an even bigger deceleration in Azure revenue growth is likely give fuel to the bears who have predicted 2023 will be an uphill year for the cloud software industry. Tonight’s subsequent reversal in Microsoft’s stock price after management unveiled its guidance is why we always urge investors to wait to trade a stock until after listening into a company’s earnings conference call. We remain intrigued by Microsoft’s investment in OpenAI and the revolutionary ChatGPI platform . But continued uncertainty around growth in cloud computing and timing over when the PC market will trough — and what growth looks like thereafter — keeps us as long-term holders, but on the sidelines. Companywide highlights Productivity and business processes revenue of about $17 billion was a beat and came in at the high end of management’s adjusted guidance range (which accounts for foreign exchange) of $16.72 billion to $17.02 billion. Office 365 commercial revenue increased 18% on a constant currency basis, with seat growth up 12%, driven by offerings for small-and-medium businesses and frontline workers. Seat growth, or user subscriptions, will be something to watch in the quarters as more companies, especially in technology, lay off workers. Dynamics 356 revenue was up 29% in constant currency, while LinkedIn’s revenue increased by 14% in constant currency. Intelligent cloud revenue of $21.51 billion was in line with consensus forecasts and at the high end of management’s adjusted guidance range of $21.27 billion to $21.57 billion. The single most important line item in this segment — and, arguably, for the entire company — is revenue growth from Azure and other cloud services. Azure revenue growth increased 31%, or 38% on a constant currency basis, year-over-year. Expectations came down significantly over the past few weeks as analysts slashed growth estimates on concerns about a moderation in cloud consumption and customers optimizing their workloads. But Microsoft still beat Wall Street expectations for a constant currency growth rate of about 37%. Personal computing disappointed, with revenues of $14.24 billion missing estimates and ending the quarter below the low end of management’s adjusted guidance range of $14.51 billion to $19.41 billion. Some of the biggest declines within this segment came from Windows software, along with devices. Both were hurt by continued weakness in the PC market. Windows commercial products and cloud revenues increased 3% in constant currency. Gaming revenue fell by a double-digit percentage point on both the Xbox content and services side, as well as Xbox hardware. Note: Constant currency growth rates help strip out fluctuations in foreign currency, namely a strong U.S. dollar, to provide a clearer financial picture. Guidance During the conference call following the earnings release, management provided the following guidance for Microsoft’s fiscal third quarter. Management’s collective guidance was about $1.42 billion short of analysts’ forecasts. Of note, management sees Office 365 revenue growth sequentially lower by roughly 1 percentage point on a constant currency basis. The company expects Azure revenue growth to decelerate by roughly four-to -five percentage points in constant currency, down from the mid-30s percentage it attained last quarter. This implied range of a low-30s percentage is below the consensus estimates of 33.7%. And at its personal computing unit, Microsoft sees Windows revenue coming in at a percentage around the mid-to-high 30s. For Microsoft’s full fiscal year, it expects operating margins to decline roughly one percentage point in constant currency, excluding a second-quarter restructuring charge and favorable impacts from a accounting change related to existing servers. (Jim Cramer’s Charitable Trust is long MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.Thomas Trutschel | Photothek | Getty Images

Microsoft (MSFT) delivered better second-quarter results than many on Wall Street anticipated, initially sending shares soaring in afterhours trading. But the stock retreated after management announced softer-than-expected guidance for the technology giant’s third quarter — underscoring our decision to remain sidelined buyers for now.

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