Microsoft (MSFT) shares slumped lower Wednesday after the tech giant's near-term outlook for its key cloud computing business offset a better-than-expected December quarter earnings report.
Shares slipped lower in after-hours trading last night, in fact, when the group forecast current quarter revenues for its intelligent cloud division of between $21.7 billion and $22 billion, a tally that missed Refinitv forecasts.
Investors had originally cheered Microsoft's December quarter gains, particularly with revenue from Azure, its flagship cloud division, rising 31% from last year and topping Street forecasts. The growth rate for that unit continues to decline, however, following a recent run of advanced in the mid to high 40-percent range as companies pull back on digital infrastructure spending.
"Just as we saw customers accelerate their digital spend during the pandemic, we are now seeing them optimize that spend," CEO Satya Nadella told investors on a conference call late Tuesday. "Also, organizations are exercising caution given the macroeconomic uncertainty."
Microsoft's overall group revenues rose 1.9% to $52.7 billion for Microsoft's fiscal second quarter, coming in just shy of analysts' estimates of a $52.97 billion tally, while its bottom fell 12% to $16.4 billion.
Productivity and business division revenues, which includes Office 365, rose 7% to $17 billion, Microsoft said, while Intelligent Cloud revenues were up 18% to $21.5 billion, a tally the company had guided in late October. More Personal Computing revenues, which includes Windows, fell 19% to $14.2 billion.
Adjusted earnings fell 6.5% from last year to $2.32 per share, just ahead of the Street consensus forecast of $2.30 per share.
"We are seeing customers exercise caution in this environment, and we saw results weaken through December," said CFO Amy Hood. "We saw moderated consumption growth in Azure and lower-than-expected growth in new business across the stand-alone Office 365, EMS, and Windows commercial products that are sold outside the Microsoft 365 suite."
"Azure and other cloud services revenue grew 31% and 38% in constant currency. As noted earlier, growth continued to moderate, particularly in December, and we exited the quarter with Azure constant-currency growth in the mid-30s," she added. "From a geographic perspective, we saw strong execution in many regions around the world. However, performance in the U.S. was weaker than expected."
Microsoft shares were marked 0.5% lower in early afternoon trading Wednesday following last night's earnings release to change hands at $240.83 each.
"We believe Microsoft deserves a premium valuation relative to the market and its Pac4 comparables as we see the investment in OpenAI as a source of upside, and possibly a short-term catalyst," said D.A. Davidson analyst Gil Luria, who carries a 'buy' rating on the stock and lifted his price target by $10 to $280 per share following last night's earnings.
"By reporting earnings early, we believe Microsoft is in better shape than other Pac4 (Apple, Amazon, Google) and software stocks that still have to reset expectations for the 2023 spending slowdown," he added.
Last week, Microsoft unveiled plans earlier this month to slash around 5% of its global workforce as it looks to 'align costs' with customer demand and boost investment in areas such as AI and other advanced technologies. The company said severance payments and other costs linked to the cuts were pegged at $800 million.
Microsoft said the cuts, which it expects to conclude in March, will result in the loss of around 10,000 jobs and a 12 cent hit to December quarter earnings, but added that it would continue to invest in areas such as AI and other advanced technologies.
To that end, Microsoft confirmed Monday that it will expand its partnership in OpenAI, an artificial intelligence group founded by Tesla (TSLA) CEO Elon Musk, with a multibillion investment that extends its collaboration with OpenAI and its key consumer and business product, the ChatGPT chatbot.
