Microsoft Stock Is Gaining Because Cloud Strength Trumps an Earnings Miss

Microsoft’s revenue grew 12% in the June quarter from a year earlier.

Microsoft MSFT –2.68%  stock moved higher after the software giant posted results slightly below estimates but showed continued strong demand for the company’s cloud-computing business.

The company also said it expects double-digit revenue and profit growth for its June 2023 fiscal year.

Slowing PC demand and a host of economic and geopolitical issues weighed on results in the latest quarter. For the fiscal fourth quarter, Microsoft posted revenue of $51.9 billion, up 12% from a year ago, or up 16% in constant currency, a hair below the company’s guidance range for the quarter.

Earnings were $2.23 a share, up 3% from a year ago, and likewise a bit below the low end of the company’s forecast range from $2.24 to $2.32 a share. Operating income was $20.5 billion, up 8% or 14% in constant currency.

After initially slipping in after-hours trading, Microsoft shares were up about 3.3% in premarket trading Wednesday. The stock moved higher after the company’s comments on the earnings conference call about its outlook for the June 2023 fiscal year.

Microsoft Chief Financial Officer Amy Hood noted that commercial bookings were up 25%, or up 33% in constant currency. Cloud revenue was $25 billion, up 28%—giving the cloud business a run rate of $100 billion.

“As we begin a new fiscal year, we remain committed to balancing operational discipline with continued investments in key strategic areas to drive future growth,” she said.

But results were affected by various macroeconomic conditions and other “unforeseen items,” Microsoft said, reducing revenue by about $1 billion.

The company said that unfavorable exchange rates reduced revenue by $595 million and profits by four cents a share. The company said that production shutdowns in China in April and May and “a deteriorating PC market in June” reduced Windows revenue by more than $300 million. Reduced advertising spending on LinkedIn, Search, and news dented the top line by more than $100 million.

Microsoft took $126 million in operating expenses in the quarter for bad debt, asset impairment, and severance related to the scale-down of the company’s operations in Russia. And the company took $113 million in severance expenses for the “strategic realignment” of its business groups in addition to the measures related to Russia.

Microsoft breaks out three reporting segments. For “intelligent cloud,” which includes Azure, the company had revenue of $20.9 billion, just below the low end of the company’s forecast range from $20.92 billion to $21.17 billion. Azure revenue rose 40%, or rose 46% in constant currency.

For “more personal computing,” which includes Windows, Surface, Xbox, Bing, and various other things, the company posted revenue of $14.4 billion, below the forecast range from $14.54 billion to $14.84 billion. Xbox hardware sales were down 11%, or 8% in constant currency.

For “productivity and business processes,” which includes Office and other software, the company reported revenue of $16.6 billion, in the middle of the forecast range from $16.48 billion to $16.73 billion.

For the full fiscal year ended June 2022, the company’s revenue was $198.3 billion, up 18%, with earnings of $9.65 a share, up 20% from a year ago.

The company repurchased $7.8 billion of common stock in the quarter.

On a conference call with analysts, the company said it expects double-digit growth in both revenue and operating income for its 2023 fiscal year, both as reported and in constant currency. The company said the foreign exchange will be about a four percentage point headwind for the year, with a higher impact in the year’s first half than in the second half. The company also noted an important accounting change, extending the useful life of cloud-related hardware to six years from four years, spreading out depreciation expense over a longer period. That change, Hood said on the call, will boost operating income by about $3.7 billion for the new fiscal year and $1.1 billion for the September quarter.

For the September quarter, Microsoft sees Intelligence Cloud revenue up between 25% and 27% in constant currency, to between $20.3 billon and $2.06 billion, about in line with Street estimates. Hood said that Azure growth in constant currency will be about 3 percentage points lower than the June quarter.

For Productivity and Business Processes, Hood sees revenue in the quarter up 12% to 14% in constant currency, to between $15.95 billion and $16.25 billion, which is below the old Street consensus at $16.9 billion.

For More Personal Computing, Hood is projecting growth in the quarter of 1% to 4%, to a range of $13 billion to $13.4 billion, below the consensus of $13.9 billion.

Overall, that implies revenue for the quarter of $49.25 billion to $50.25 billion, a bit below the Wall Street consensus of $51.375 billion.