Microsoft’s earnings weren’t as horrible as they appeared

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Wednesday, July 27, 2022

Saved by the cloud

Microsoft (MSFT) reported its fiscal Q4 earnings on Tuesday, missing analysts’ expectations on the highest and backside strains. So why is the corporate’s inventory buying and selling increased? Effectively, to be frank, it simply wasn’t as dangerous because it might have been.

Sure, the tech big nonetheless faces the identical macroeconomic pressures as the remainder of the business: inflation, rising rates of interest, COVID, and the battle in Ukraine. And sure, Microsoft did miss income expectations for its Clever Cloud and Enterprise Productiveness Processes divisions, each of which drive the corporate’s cloud-based providers.

However Microsoft nonetheless got here out of the report with Wall Avenue on its aspect. Shares of the Redmond, Washington-based tech behemoth traded greater than 5% increased on Wednesday afternoon, and analysts had been praising Microsoft. The rationale? Microsoft’s all-important cloud enterprise.

That’s proper — although Microsoft missed income expectations on its cloud providers, its Azure enterprise income jumped 40%-year-over-year. And, in response to CEO Satya Nadella, harsh financial circumstances really profit the corporate’s cloud enterprise In spite of everything, subscribing to a cloud service is cheaper in the long term than operating your individual inside servers.

“Total, we’re not proof against what’s occurring within the macro broadly,” Nadella stated throughout Microsoft’s earnings name on Tuesday.

“However what’s occurring in Azure, although, is in some sense companies attempting to take care of the general macroeconomic state of affairs [are] attempting to verify they will do extra with much less. So for instance shifting to the cloud is the easiest way to form your spend with demand uncertainty.”

Both means, it’s an enormous win for Microsoft — particularly since its gaming and PC companies took huge hits within the quarter. It’s clear issues might have been a lot worse for Nadella and firm.

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Microsoft’s cloud remains to be its secret weapon

Microsoft’s cloud providers have been its largest asset of the previous a number of years, pushing its market cap ever increased. Previous to the latest financial downturn, Microsoft’s cloud enterprise helped push its market cap past the $2 trillion mark. It’s since pulled again barely to only underneath $2 trillion.

“So, what’s the cloud, precisely?” you would possibly ask. Microsoft’s cloud choices are, roughly, pc servers that firms hire. Reasonably than shopping for, putting in, working, and troubleshooting their very own infrastructure, cloud providers like Microsoft’s do all the heavy lifting. In consequence, companies can deal with getting work completed, reasonably than worrying about whether or not they should improve their server {hardware} and software program.

Microsoft recurrently updates its cloud choices, which means its prospects all the time use the most recent and biggest processors and applications. And that’s what attracts so many shoppers.

What’s extra, whereas Microsoft missed earnings, it nonetheless offered stable steerage for 2023.

“We proceed to anticipate double-digit income and working earnings progress in each fixed forex and U.S. {dollars},” Microsoft CFO Amy Hood stated in the course of the firm’s earnings name. “Development shall be pushed by continued momentum in our business enterprise and a deal with share positive factors throughout our portfolio.”

And in response to Wedbush analyst Dan Ives, Microsoft’s total efficiency ought to function a optimistic indicator for a way companies are persevering with to spend on cloud infrastructure.

“[Microsoft] stated they’re seeing agency buyer demand and clear energy on the cloud bookings entrance within the discipline with the digital transformation enterprise shift accelerating,” Ives wrote in an analyst word.

Mizuho analyst Gregg Moskowitz supplied the same evaluation of Microsoft’s outlook.

“However what’s clearly a harder working setting, we stay assured that [Microsoft’s] progress alternatives over the medium-term and past are higher than many understand, and that [Microsoft] is positioning for materially higher success in cloud,” Moskowitz wrote in a word.

Microsoft’s {hardware} and software program companies won’t be as fortunate

Whereas Wall Avenue is stoked to see Microsoft’s cloud enterprise’s continued progress, the corporate’s different divisions displayed some weak point. Particularly, income for Microsoft’s OEM enterprise — which sells Home windows licenses to third-party PC makers — dropped year-over-year, as did income for its gaming group.

The corporate blamed the decline in PC gross sales on COVID-related shutdowns in China, which hindered third-party PC makers’ capability to supply and promote models. As for Microsoft’s gaming woes, the corporate blames a slowdown in Xbox {hardware} gross sales and income on decrease consumer engagement and purchases.

The broader PC market is already falling again from its prior pandemic highs, with IDC reporting that gross sales slid for the second quarter in a row in July. That goes for gaming, as nicely, which NPD says will proceed to fall amid inflation, individuals going again out into the world, and a lull in main releases.

And but, regardless of these ongoing issues, Microsoft continues to energy on. And it could possibly thank the cloud for that. We’ll now need to see if Microsoft’s largest cloud competitor, Amazon (AMZN), can get the identical enhance from its Amazon Net Providers division when it reviews earnings Thursday.

By Daniel Howley, tech editor at Yahoo Finance. Comply with him @DanielHowley

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