Microsoft Shares Rise on Upbeat 2023 Sales Growth Forecast

Microsoft Shares Rise on Upbeat 2023 Sales Growth Forecast

(Bloomberg) — Microsoft Corp. gave an upbeat sales forecast for the fiscal year that just began, easing investor concerns about growth that had flared after a lackluster fourth-quarter earnings report. Shares rose more than 5% in late trading, reversing earlier declines.

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In a conference call Tuesday, the software giant said it expects revenue and operating income to grow at a double-digit pace for fiscal 2023, which ends next June. Currency fluctuations will reduce sales by about 4% in the year and about 5% in the current quarter, Microsoft executives said, tempering concerns that the strength of the US dollar will have an even greater impact on the value of sales abroad.

The forecast was “surprisingly strong,” said Dan Ives, an analyst at Wedbush. The prognosis “will be the guide that is heard around the world and on the street.”

Microsoft said it is attracting bigger deals for its Azure cloud computing software and moving customers to more expensive versions of Office cloud programs. The company’s spending will slow as the year progresses and the pace of hiring will slow after it adds a planned 11,000 workers in the current period. The turbulent economic landscape will lead some customers to gravitate toward Microsoft products and cloud software in general because it can help them control what they spend on technology, CEO Satya Nadella said on the call.

“Coming out of this macroeconomic crisis, the public cloud will be even more of a winner,” Nadella said.

Microsoft shares rose as much as $269.41 in extended trading following the forecast. They had fallen about 2% immediately after the earnings report, after falling to $251.90 at the close in New York. While the stock jumped 51% in 2021, it is down 25% year-to-date amid a slide in big tech stocks.

The company previously reported fourth-quarter sales and earnings below analysts’ projections, held back by unfavorable exchange rates and weaker demand for cloud computing services, personal computer software and advertising in its online properties. .

Revenue in the fourth quarter, which ended June 30, rose 12% to $51.9 billion, the software maker said in a statement. Net income increased to $16.7 billion, or $2.23 per share. On average, analysts had estimated sales of $52.4 billion and $2.29 a share in earnings, according to a Bloomberg survey. Revenue growth in Azure cloud computing services slowed to 40%, a closely watched rate that also fell short of predictions.

The rising US dollar, which reduces the value of overseas sales, hurt revenue and profit in the latest quarter, prompting Microsoft to cut its forecasts in early June. The company has reduced hiring in some divisions, such as Azure and Office, which makes productivity software for PCs. Overall sales increased the least from September 2020, with Azure growth rates continuing to decline and the broader PC market on track for an annual decline. Demand slowed further in the final weeks of Microsoft’s quarter as customers delayed purchases in anticipation of a possible global recession, said Derrick Wood, an analyst at Cowen.

“After Memorial Day, things started to slow down and you started hearing more cautious buying behavior and longer sales cycles,” Wood said.

Analysts forecast Azure revenue to rise 44%, according to a Jefferies note. In the third fiscal quarter, the division posted 46% growth.

Excluding the currency impact, Azure growth was 1% lower than forecast in April, Chief Financial Officer Amy Hood said in an interview. Still, the company signed a record number of Azure contracts worth more than $100 million and $1 billion, she said.

Business bookings, a measure of future sales to corporate customers, were “significantly” better than the company expected, rising 25%, an indication that corporate demand for Microsoft software remained strong in the quarter, it said. .

“We do most of our commercial booking business in June,” Hood said. “It was a record quarter for us and much better than we had planned.”

Redmond, Washington-based Microsoft lowered its fourth-quarter sales and profit forecast in June, blaming the stronger US dollar for a $460 million hit to revenue. The software giant said on Tuesday that currency shocks in the period were even more pronounced than it projected. The war in Ukraine caused the company to scale back its operations in Russia, resulting in accounting expenses of $126 million. In addition, hardware production shutdowns in China and a worsening PC market affected sales of Windows operating system software to PC manufacturers.

Microsoft also recorded $113 million in severance pay in the recent period. Earlier this month, Microsoft said it cut less than 1% of its 180,000-person workforce, affecting groups such as consulting and customer solutions, but said it planned to end the current fiscal year with a larger headcount. The company has also cut many open positions and reduced hiring even at units that make Azure, Windows, Office and security software. These hiring restrictions will continue for the foreseeable future, the company said last week.

Microsoft’s overall revenue from cloud products, which include Azure and web-based versions of Office software, rose 28% to $25 billion, the company said in slides posted on its website.

Google parent Alphabet Inc., which also reported earnings Tuesday, has issued a similar note of caution about hiring, as have Apple Inc. and Amazon.com Inc., and shareholders are closely scrutinizing the hiring figures. the tech industry for signs of declining demand. Social media companies Twitter Inc. and Snap Inc. reported disappointing sales last week, and Microsoft said lower ad spending hurt results at its LinkedIn professional network and search division.

Global PC shipments fell more than 15% in the quarter, according to IDC, although they remain above pre-pandemic levels. Microsoft has been able to post higher PC software revenue by shipping more versions of higher-priced corporate versions of its programs.

On the call, Microsoft executives said they expect weakness in the PC and advertising markets to persist.

(Updates with analyst comments in the third paragraph, CEO in the fifth paragraph).

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