Microsoft (MSFT) shares fell on Wednesday after the company released mixed December quarter results and disappointing guidance. MSFT stock fell more than 3% on the news.
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The Redmond, Wash.-based company beat expectations for earnings in the fiscal second quarter late Tuesday, but sales were weak. The sales forecast for the March quarter also came in well below Wall Street estimates.
Microsoft earned an adjusted $2.32 per share on revenue of $52.7 billion in the December quarter. Analysts polled by FactSet had forecast Microsoft earnings of $2.29 per share on sales of $53 billion. Year over year, Microsoft’s earnings fell 6% while revenue rose 2%.
It was the first earnings decline for Microsoft in five years since the December quarter of 2017.
MSFT stock falls on outlook
In this morning’s stock market trading, MSFT shares fell 3.3% to 234.13. During Tuesday’s regular session, MSFT shares fell 0.2% to close at 242.04.
In the December quarter, Microsoft’s Azure infrastructure and other cloud computing services grew faster than expected during the period. However, Azure’s growth is slowing.
“Microsoft Cloud revenue was $27.1 billion, an increase of 22% (up 29% in constant currency) year over year as our commercial offerings continue to drive value for our customers,” said Chief Financial Officer Amy Hood in a press release.
Of Microsoft’s three business segments, Intelligent Cloud was the top performer in the December quarter. Revenue in this segment 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 posted revenue growth of 31%, or 38% in constant currency. That beat prospects for currency-neutral growth of 37%.
Meanwhile, Microsoft’s productivity and business process unit saw revenue increase 7% to $17 billion. The division includes Office productivity software, as well as the Dynamics and LinkedIn businesses.
Windows PC, bad device sales
Finally, Microsoft’s More Personal Computing unit saw revenue decline 19% to $14.2 billion. The unit includes Windows PC software, Xbox video games, Surface computers, Internet search and advertising.
Windows licensing revenue plummeted 39% in the holiday sales quarter as PC sales fell. Equipment sales also fell 39%. And revenue from Xbox content and services fell 12% during that period.
Jefferies analyst Brent Thill said Microsoft’s results were “better than feared.” He rates MSFT shares as a Buy with a target price of 280.
In a conference call with analysts, Microsoft executives forecast revenue for the fiscal third quarter that came in below Wall Street estimates.
Microsoft forecast sales of $50.5 to $51.5 billion for the current quarter. The median 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 revenue of $49.4 billion.
The company also forecasts a continued slowdown in Azure revenue growth.
Microsoft News: Layoffs, AI Investments
The earnings report came after Microsoft announced major 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 $1.2 billion charge in the just-ended quarter related to severance and other restructuring costs. That reduced earnings by 12 cents per share.
Microsoft also warned that customers would scale back spending in a difficult macroeconomic climate.
At the same time, Microsoft announced that it would continue to increase staff and invest in growth areas such as cloud computing and artificial intelligence.
On Monday, Microsoft announced a new $10 billion investment in artificial intelligence startup OpenAI. OpenAI is the organization behind the text generator ChatGPT and the image generator Dall-E. Microsoft has already 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 a medium compound rating
MSFT shares rank second out of six stocks in IBD’s computer software desktop industry group according to the IBD Stock Checkup. It has a mediocre IBD Composite Rating of 58 out of 99.
IBD’s composite rating combines five separate proprietary ratings into one user-friendly rating. The best growth stocks have a composite rating of 90 or better.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories about consumer technology, software and semiconductor stocks.
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