Microsoft dips on weak revenue guidance

Key Points
  • Microsoft's results beat across the board as Azure grew more than some analysts had expected, although guidance for the next quarter was soft.
  • The company's gross margin is benefiting from an accounting change related to depreciation of server equipment.

In this article

Microsoft beats on the top and bottom line with better-than-expected operating income
Microsoft beats on the top and bottom line with better-than-expected operating income

Microsoft shares moved 2% lower in extended trading on Tuesday after the company reported quarterly revenue guidance that fell short of analysts' expectations. Fiscal first-quarter earnings exceeded estimates, though.

Here's how the company did:

  • Earnings: $1.82 per share, adjusted, vs. $1.54 per share as expected by analysts, according to Refinitiv.
  • Revenue: $37.15 billion, vs. $35.72 billion as expected by analysts, according to Refinitiv.

With respect to guidance, Microsoft expects $39.5 billion to $40.4 billion in fiscal second-quarter revenue, Amy Hood, the company's chief financial officer, told analysts on a conference call. The middle of that range, at $39.95 billion, implies 8% annualized growth, and it's below the Refinitiv consensus estimate of $40.43 billion. Hood suggested that softer business demand would continue to cut into Windows licensing revenue.

In the fiscal first quarter, Microsoft revenue grew 12% on an annualized basis, down from 13% growth in the prior quarter, according to a statement.

Revenue for commercial PCs cratered 22% months after support for Windows 7 ended and the coronavirus pandemic took hold; the category had surged last year, making outperformance this year more difficult.

But one of the fastest-growing parts of Microsoft, the Azure public cloud for hosting applications and websites, grew 48%, accelerating from 47% in the prior quarter. Microsoft doesn't disclose revenue from Azure in dollars. Analysts had expected around 44% growth.

Microsoft's Intelligent Cloud segment, featuring Azure, Enterprise Services, GitHub and server products such as SQL Server and Windows Server, contributed $12.99 billion in revenue, up 20% year over year and more than the $12.73 billion consensus among analysts polled by FactSet.

The Productivity and Business Processes segment, which includes Dynamics, LinkedIn and Office, delivered $12.32 billion in revenue. That's up 11% and higher than the $11.78 billion FactSet consensus. Teams, one part of the Office 365 productivity app bundle, now has over 115 million daily active users, up from 75 million in April, CEO Satya Nadella said on the call.

Revenue from the More Personal Computing segment, containing search advertising, Surface, Windows and Xbox, came to $11.85 billion. That means the segment's revenue grew 6% year over year, and it was above the $11.18 billion consensus among analysts surveyed by FactSet. Microsoft will release the Xbox Series X and Series S consoles on Nov. 10, and Hood called for gaming revenue growth in "the high 20% range" in the fiscal second quarter, which would be up sequentially from 21.6% growth in the fiscal first quarter.

Licensing revenue from Windows device makers declined 5% in the quarter, and licensing revenue for commercial devices in particular fell some 22%, compared with the 4% decrease in the prior quarter, the worst performance in more than five years. Technology industry research company Gartner estimated that third-quarter PC shipments grew 3.7% year over year and saw the fastest growth in the U.S. in a decade.

Microsoft's search advertising business declined 10%, and Hood said Microsoft sees a "decline in the mid to high single-digit range" in the fiscal second quarter.

The Commercial Cloud collection of products, including Azure, Dynamics 365, commercial LinkedIn and Office 365 services, added up to $15.2 billion in revenue, representing almost 41% of total revenue, up from around 38% in the prior quarter. Commercial Cloud gross margin was 71%, passing the 70% mark for. the first time.

This is the first quarter Microsoft benefits from an accounting change that extended the useful life of its server equipment from two years to four years.

In the quarter Microsoft announced the $7.5 billion acquisition of Zenimax Media, the company behind video game franchises such as Doom and Quake, and Microsoft failed to make a deal involving the video-sharing app TikTok.

In January, Microsoft announced a goal to be carbon-negative, which would involve removing more carbon than it emits, by 2030. In the fiscal first quarter Microsoft provided an update, saying it had extended an internal carbon tax to all parts of its operations and updated its code of conduct for suppliers so that suppliers will have to specify their emissions.

Excluding the after-hours move, Microsoft shares are up about 36% since the start of 2020, while the S&P 500 is up 5% over the same period.

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