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Microsoft soothes market fears with forecast for strong revenue growth

Stock Markets Jul 27, 2022 01:46PM ET
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© Reuters. FILE PHOTO: A Microsoft logo is seen in Los Angeles, California U.S. November 7, 2017. REUTERS/Lucy Nicholson

By Akash Sriram and Jane Lanhee Lee

(Reuters) -Microsoft Corp on Tuesday forecast revenue this fiscal year would grow by double digits, driven by demand for cloud computing services and sending shares up 5%.

The strong outlook shows Microsoft (NASDAQ:MSFT) continues to benefit from the pandemic-led shift to hybrid work models and comes at a time when investors are bracing for an economic downturn, with inflation roaring and consumers cutting spending.

Bob O’Donnell, an analyst for TECHnalysis Research, said Microsoft's forecast shows that despite the negative economic trends, companies continue to move more business and work online.

"I don't think it's unique to Microsoft," he said about the outlook. "Microsoft is extraordinarily well positioned because of the range of businesses it has and the critical role their software and computing services play for organizations."

Despite the positive forecast for the fiscal year starting July 1, Microsoft results for the fourth quarter amounted to a slight miss, hurt by a stronger dollar, slowing sales of PCs and lower advertiser spending.

Still Microsoft had its best quarter for its cloud business with record bookings for its cloud service called Azure, said Brett Iversen, Microsoft's general manager of investor relations.

Azure growth was 40%, missing the 43% analyst target compiled by Visible Alpha. It was up 46% if foreign exchange factors are eliminated. In its broader Intelligent Cloud division, revenue was up 20% to $20.9 billion, ahead of the average Wall Street target of $19.1 billion, according to Refinitiv.

For the first quarter ending Sept. 30, the Intelligent Cloud division was forecast to bring in $20.3 billion to $20.6 billion, with the upper end slightly above analysts' forecasts.

"We are seeing larger and longer-term commitments and won a record number of $100 million-plus and $1 billion-plus deals this quarter," said CEO Satya Nadella. "We have more data center regions than any other provider and we will launch 10 regions over the next year."

Microsoft faces pressure from a stronger greenback as it gets about half of its revenue from outside the United States. That led the company to lower its fourth-quarter profit and revenue forecasts in June. Shares of the Redmond, Washington-based company have fallen about 25% this year.

The U.S. dollar index rose over 2% in the quarter ended June and nearly 12% this year, compared to a 1% drop a year earlier for the same period.

Without the stronger dollar, the company's 12% year-on-year revenue growth would have been 4 percentage points higher, Iversen told Reuters. Three main factors reduced fourth-quarter revenue by about $1 billion.

Foreign exchange negatively impacted revenue by nearly $600 million. A slowdown in the PC market hit Windows OEM revenue by over $300 million. And advertising spend slowdown hit LinkedIn and Search and news ad revenue by over $100 million.

"With Microsoft being the size that they are, it's hard for them not to reflect the overall economy," John Freeman, vice president of equity research at CFRA Research. "We've got inflation and that's obviously going to dampen consumer demand."

Softer consumer demand also hit gaming revenue, which fell 7% year-on-year due to a drop in Xbox hardware, content and services, the company said. It is expected to fall in the low to mid-single digits this quarter, driven by declines in first-party content.

Microsoft reported revenue of $51.87 billion in the fourth quarter, compared with $46.15 billion a year earlier. Analysts on average had expected revenue of $52.44 billion, according to Refinitiv IBES data.

Net income rose to $16.74 billion, or $2.23 per share, during the quarter ended June 30, from $16.46 billion, or $2.17 per share, a year earlier.

Microsoft soothes market fears with forecast for strong revenue growth
 

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Comments (5)
Antonin Brocard
Antonin Brocard Jul 27, 2022 11:01AM ET
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They did not miss, read the announcement, not just the headlines
Rob Stone
Rob Stone Jul 26, 2022 11:17PM ET
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They miss, and stock moves higher?
Casador Del Oso
Casador Del Oso Jul 26, 2022 7:13PM ET
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recession reimagined...earnings miss results in higher stock prices
JIM VETTER
JIM VETTER Jul 26, 2022 4:18PM ET
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Both Microsoft and Google miss but not as badly as thought. Pushing higher aftermarket. The new norm.
Art Carrano
Art Carrano Jul 26, 2022 4:14PM ET
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Bloodbath tomorrow. I'll be buying cheap shares.
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G D
G D Jul 26, 2022 4:14PM ET
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And even after a recession you'll be waiting some time before your investment is neutral let alone turning a profit
Gordan Zamic
Gordan Zamic Jul 26, 2022 4:14PM ET
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only up 🚀🚀🚀
Art Carrano
Art Carrano Jul 26, 2022 4:14PM ET
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I'm holding between 7-10 years.
ottin nerner
ottin nerner Jul 26, 2022 4:14PM ET
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man!!!! your patience, i couldn't holdt equities more than 6 months.... im more on swing than holding too long....
G D
G D Jul 26, 2022 4:14PM ET
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Art Carrano Fair play
 
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