Tuesday, July 26, 2022 04:01 PM

By Dina Bass

  • Software giant eases concerns about demand, strong US dollar
  • Quarterly results earlier missed analysts’ reduced estimates

(Bloomberg) —

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

On a conference call Tuesday, the software giant said it expects revenue and operating income to increase at a double-digit pace for fiscal 2023, which ends next June. Currency fluctuations will cut sales by about 4% for the year and about 5% in the current quarter, Microsoft executives said, tempering worries that the strong US dollar would have an even bigger impact on the value of overseas sales.

The forecast was “shockingly strong,” said Dan Ives, an analyst at Wedbush. The forecast “will be the guidance heard around the world and Street.”

Microsoft said it is attracting more large deals to its Azure cloud-computing software and moving clients to pricier versions of Office cloud programs. The company’s expenses will decelerate as the year goes on and as the pace of hiring slows after it adds a planned 11,000 workers in the current period. The turbulent economic picture will lead some customers to gravitate to Microsoft’s products and to cloud software more generally because it can help them control what they’re spending on technology, Chief Executive Officer Satya Nadella said on the call.

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

Microsoft shares rose as high as $269.41 in extended trading following the forecast. They had dropped about 2% immediately following the earnings report, after falling to $251.90 at the close in New York. While the stock jumped 51% in 2021, it has fallen 25% so far this year amid a rout in large technology stocks.

Earlier, the company reported fourth-quarter sales and profit that fell short of analysts’ projections, held back by unfavorable currency exchange rates and weaker demand for cloud-computing services, personal-computer software and advertising on 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 rose to $16.7 billion, or $2.23 a 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 missed predictions.

The surging US dollar, which reduces the value of foreign sales, hurt revenue and profit in the recent quarter, prompting Microsoft to cut its forecasts in early June. The company has slowed hiring in some divisions, like Azure and Office, which makes PC productivity software. Overall sales rose the least since September 2020, with Azure growth rates continuing to tick lower and the broader personal-computer market on track for an annual decline. Demand slowed further in the last few weeks of Microsoft’s quarter, as customers delayed purchases in anticipation of a possible global recession, said Derrick Wood, an analyst at Cowen.

“Post-Memorial Day, things started getting slower and you started hearing more cautious buying behavior and longer sales cycles,” Wood said.

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

Excluding the impact of currency, 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.

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

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

Redmond, Washington-based Microsoft in June reduced its sales and profit forecast for the fourth quarter, blaming the stronger US dollar for a revenue hit of $460 million. The software giant on Tuesday said currency impacts in the period were even steeper than it projected. The war in Ukraine prompted the company to scale back in Russia, leading to accounting charges of $126 million. Additionally, hardware-production shutdowns in China and a worsening PC market hurt sales of the Windows operating system software to computer makers.

Microsoft also recorded $113 million in severance payments 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 finish the current fiscal year with increased headcount. The company has also eliminated many open jobs and slowed hiring including in units that make Azure, Windows, Office and security software. These hiring constraints will continue for the foreseeable future, the company said last week.

Microsoft’s overall revenue from cloud products, which includes 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 sounded a similar note of caution on hiring, as have Apple Inc. and Amazon.com Inc. — and shareholders are scrutinizing technology industry numbers closely for signs of wilting demand. Social media companies Twitter Inc. and Snap Inc. last week reported disappointing sales — and Microsoft said lower advertising spending hurt results at its LinkedIn professional network and in the Search division.

Global PC shipments dropped 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 ad markets to persist.